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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 1998 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
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
------------------- ------------------------
Class A Common Stock (par value $.01 per share) New York Stock Exchange
Series A Fixed/Adjustable Rate None
Cumulative Preferred Stock
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
/X/ Yes / / No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
Aggregate market value of voting common stock held by non-affiliates,
computed as of March 9, 1999 was $385,095,054.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of the latest practicable date.
DATE CLASS SHARES OUTSTANDING
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March 9, 1999 A 23,825,768
DOCUMENTS INCORPORATED BY REFERENCE
Certain information contained in registrant's Proxy Statement for the
Annual Meeting of Stockholders to be held May 14, 1999, is incorporated by
reference into Part III hereof.
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PART I
ITEM 1. BUSINESS
GENERAL
ARM Financial Group, Inc. (the "Company") specializes in the growing asset
accumulation business with particular emphasis on retirement savings and
investment products. The Company's earnings are derived from investment spread
(the difference between income earned on investments and interest credited on
customer deposits) and fee income. The Company's retail products include a
variety of fixed, indexed and variable annuities and face-amount certificates
sold through a broad spectrum of distribution channels including independent
broker-dealers, independent agents, stockbrokers, and financial institutions.
The Company offers institutional products, such as funding agreements,
certificates and guaranteed investment contracts ("GICs") marketed to defined
contribution plans, bank collective trust funds, GIC investment managers, money
market funds, corporate treasurers, and other institutional investors.
The Company was established in July 1993 and completed its acquisition of
Integrity Holdings, Inc. in November 1993. The Company's assets under management
have grown from $2.3 billion as of December 31, 1993 to $9.9 billion as of
December 31, 1998. The Company attributes this growth to internally generated
sales, new product offerings and opportunistic acquisitions. Operating earnings
(net income applicable to common shareholders excluding, net of tax, realized
investment gains and losses, non-recurring charges and income from defined
benefit pension plan asset management operations which were sold in November
1997) have grown to $43.3 million in 1998 from $34.1 million in 1997 and $22.2
million in 1996. In June 1997, the Company raised $78.8 million through an
initial public offering of its common stock. In May 1998, the Company completed
a secondary public offering of approximately 12.4 million shares of common stock
held by certain private equity funds (the "Morgan Stanley Stockholders")
sponsored by Morgan Stanley Dean Witter & Co. Although the Company did not
receive any of the proceeds from this secondary public offering, the sale of the
common stock resulted in the Morgan Stanley Stockholders' divestiture of its
interest in the Company. In July 1998, the Company completed a $75 million
offering of preferred stock with an initial coupon rate of 5.575% through June
15, 2003. The net proceeds from the sale of the preferred stock were used to
redeem the Company's $50 million issue of 9.5% Cumulative Perpetual Preferred
Stock on December 15, 1998 and will be used for general corporate purposes. See
"--History."
The Company expects to benefit from demographic trends and a growing demand
for retirement savings. As the U.S. population has aged, demand for retirement
savings has accelerated. According to U.S. Census Bureau information,
approximately 30% of today's population was born during the Baby Boom (1946 to
1964). By the time the Baby Boom generation begins to reach age 65 in 2011, the
population between the ages of 45 and 64 - the peak period for asset
accumulation - is projected to increase by approximately 45% to 79 million
people.
The Company also expects to benefit from anticipated higher consumer
savings due to continuing concern about the social security system, extended
life spans, and a shift from company-
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funded defined benefit plans to defined contribution plans. Among the products
expected to benefit are tax-advantaged annuities. Annual industry sales of
individual annuity products increased dramatically from $65 billion in 1990 to a
preliminary estimate of $140 billion in 1998, with projected growth of 8% to 11%
per year for the next few years, according to an industry study conducted by
LIMRA.
The Company also expects to benefit from the growing institutional
marketplace, which is partially fueled by growth in retirement and consumer
savings. The Company intends to expand its institutional deposit base both on
and off its balance sheet by developing new products and applications for
existing and new markets.
The manner in which the Company designs its capital structure for
supporting its business lines is very important. The Company must carefully
weigh improving return and satisfying the capital requirements of rating
agencies, regulators and others. Therefore, the Company mindfully seeks to
balance the interest of its shareholders (for higher risk-adjusted return) with
the requirements of safety and deposit protection for its customers. The Company
strives to achieve high return on equity and strong growth in its assets under
management through a balanced product mix, taking into consideration the capital
requirements of rating agencies and regulators. Creating the optimum balance
between these objectives is something the Company will continue to address in a
disciplined manner.
The discussion of the Company's business contains certain forward-looking
statements, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations-Forward-Looking Statements."
STRATEGY
The Company's strategy is focused on the integration of products,
technology and service and the management of these three elements in order to
create customer value and preference. The Company endeavors to develop and
retain customers and producers as a product innovator, an adapter of technology,
and a true partner with its producers. The Company believes that it has
demonstrated an ability to develop and market a broad array of customized retail
and institutional products, effectively use technology, and provide superior
service to its producers. In addition, the Company utilizes an advanced and
integrated risk management process, strives to minimize its fixed cost structure
and maintains a strong focus on profitability.
DEVELOPING AND MARKETING A BROAD ARRAY OF CUSTOMIZED PRODUCTS. The Company
believes that long-term success in the asset accumulation industry will depend
upon the Company's ability to adapt to rapidly changing consumer preferences in
fluctuating interest rate and equity market environments. The Company
continually redesigns existing products with enhanced features and continues to
develop and sell new and innovative products, with a particular focus on
minimizing its dependence on any one product and meeting a variety of needs for
consumers and distribution channels. The Company works closely with the people
involved with its retail and institutional distribution to develop products that
are customized to suit their customers' particular needs. In 1997, the Company
enhanced its multi-manager variable annuity product, PINNACLE, making it one
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of the first in the industry to offer Bankers Trust indexed funds, along with a
diverse selection of asset classes from well-known fund managers, guaranteed
rate options and the ability for systematic transfer of deposits over time - all
in one product. In 1998, the Company further enhanced its PINNACLE variable
annuity product by introducing a "Dogs of the Dow"* investment option called
SELECT TEN PLUS. This new investment option allows customers to invest in the
top ten dividend-yielding stocks in the Dow Jones Industrial Average on a tax
deferred basis. In the institutional market, the Company offers a short-term
floating rate institutional spread-based product designed to meet the market
demand for products with attractive current yields and access to liquidity. In
1997, the Company developed and funded a unique asset-backed funding agreement,
in alliance with Bayerische Landesbank Girozentrale, New York Branch, ("BLB"), a
triple-A rated international banking institution. In connection with another
highly-rated international bank, Deutsche Bank, the Company has developed a bank
investment contract ("BIC") product for the retirement savings market. Because
of the current interest rate environment, no sales of the BIC product have been
made to date. Additionally, in 1998, the Company formed a new wholly owned
subsidiary, ARM Face-Amount Certificate Group, Inc. ("ARMFAC"), for the purpose
of issuing privately placed institutional certificates through ARMFAC wholly
owned subsidiaries. The Company completed the sale of two large, privately
placed institutional certificates during 1998 in conjunction with two well known
financial institutions.
EXPANDING AND DIVERSIFYING THE DEPOSIT BASE IN THE INSTITUTIONAL
MARKETPLACE. Since the Company's inception, its institutional business has grown
to $5 billion of funding agreement, certificate and GIC deposits at December 31,
1998. The Company believes that its integrated asset/liability management
approach to the business, along with its sound underwriting philosophy, have
allowed it to build competitive advantages. The Company has found it beneficial
to form strategic partnerships with organizations possessing strong market
presence. Since 1995, the Company has sold funding agreements and GICs through
General American Life Insurance Company ("General American"), of which the
Company reinsures one-half of the business written. In late 1997, the Company
sold its first funding agreement structure outside the General American
relationship with a $500 million, five-year term offering, in alliance with BLB.
Building upon this experience, in 1998, the Company creatively designed and sold
two $500 million privately placed institutional certificates, in structured
finance transactions with two large institutional customers, through its
subsidiary, ARMFAC. All three of these $500 million transactions uniquely
utilized the asset-backed markets to allow the Company to expand the
distribution and market presence of its products.
The Company intends to continue to offer its current products with modifications
to extend the product feature which gives customers access to their deposits
with seven days written notice to longer periods ranging from 30 to 90 days. In
addition, the Company intends to continue its growth in the institutional market
by (I) diversifying its product line with (a) customized product features for
alternative distribution channels, (b) fixed maturity structures extending
beyond current product
* The Dow Jones Industrial Average, Dow and DJIA are the property of
Dow Jones & Company, Inc. Dow Jones & Company, Inc. is not affiliated
with ARM Financial Group, Inc. or its insurance company subsidiaries
and has not participated in any way in the creation or selection of
stocks included in SELECT TEN PLUS and has not approved any
information included herein.
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offerings and (c) on- and off-balance sheet products, institutional certificates
or new funding agreement products; (ii) attracting new partners with larger and
stronger balance sheets to provide credit enhancement to facilitate the
marketing of new product structures and marketing initiatives;(iii) expanding
market penetration within its existing client base while maintaining the
persistency and profitability of the current client base; and (iv) opening
additional markets for its current and new products.
ENHANCING EFFECTIVE USE OF TECHNOLOGY. The Company continues to invest in and
develop technology designed to allow for the administration of innovative
products, enhance the services provided to producers and customers, and increase
the efficiency of its operations. The Company's technology allows it to respond
quickly to customer needs for new products by reducing product development time.
The Company also believes that it is emerging as an industry leader in adapting
Internet technology to serve its producers. In 1998, the Company completed
three releases of AnnuiTRAC-SM-, its Internet-based producer services software
system, enhancing functionality and ease of use with each release.
AnnuiTRAC-SM- allows the Company to expand distribution cost-effectively and in
a user-friendly way that its producers favor. The Company now counts more than
500 active AnnuiTRAC-SM- users. The Company continues to develop its technical
platform in order to increase the efficiency of its operations. In 1998, the
Company further improved its back office operation with systems enhancements,
redesigned commission and customer statements for easier use, completed a full
function data warehouse, developed a new product administration platform, and
enhanced its financial and asset/liability management applications.
CAPTURING A GROWING SHARE OF SALES IN RETAIL DISTRIBUTION CHANNELS. Over
the past few years, the Company has built the infrastructure necessary to
support increased growth in the retail market. The Company believes that it can
distinguish itself by strengthening its relationships with individual
distributors, often referred to as producers. To accomplish this objective, the
Company seeks to (i) provide superior service to producers through an expanded
and dedicated producer services unit; (ii) enhance the Company's technological
platform to permit superior and immediate access for producers to the Company's
administrative systems for transacting business; (iii) heighten producers'
awareness of the Company's products and insurance affiliates through focused
advertisements in industry publications and selective promotional programs; and
(iv) quickly develop innovative products with new features and services which
are responsive to market needs. For example, in 1998, as a means to further
strengthen its relationships with distributors, the Company expanded the
AnnuiTRAC-SM- program. AnnuiTRAC-SM- gives certain distributors the capability
to remotely access the Company's systems and transact business with the Company
on-line. The Company also seeks to increase its retail market share by expanding
and diversifying its retail distribution channels. In 1996, the Company began
offering variable annuities through banks and thrifts, and in mid 1997
introduced a new variable annuity product customized for that distribution
channel. Additionally, the Company recognizes the importance of building and
maintaining a strong capital base. The Company's ability to expand its retail
business is dependent on interest rates and other market conditions.
IMPLEMENTING AN ADVANCED AND INTEGRATED RISK MANAGEMENT PROCESS. Using its
experience in offering investment guarantees in the insurance market sector, the
Company employs a highly analytical and disciplined asset/liability risk
management approach to develop new products and
5
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monitor investment portfolios and liabilities. The Company does not view
asset/liability management as a discrete function to be performed by a separate
committee. Instead, asset/liability management permeates every aspect of the
Company's operations. Beginning with product design and continuing through the
product sale and eventual payout, professionals in each functional area (such as
marketing, actuarial, investments, legal, finance, and administration) work
jointly with a common set of risk/return characteristics to achieve the
Company's overall liquidity and profit objectives (rather than the specific
objectives of any particular functional area). The Company implements this
process with the analytical risk and capital management skills and the
experience of its management team. This foundation is supported with
sophisticated computer software, emphasizing securities whose cash flows can be
modeled extensively against liability cash flows under different interest rate
scenarios. Risk components that cannot be appropriately modeled are identified
for potential hedging or reinsurance transactions.
MINIMIZING FIXED COST STRUCTURE. The Company attempts to minimize fixed
distribution costs by marketing its products through fiduciaries and other third
parties. Unlike many of its competitors, the Company does not maintain a
significant field sales force, and distributors are primarily paid based on
production. As a consequence of its low fixed distribution costs, the Company
has flexibility to shift the mix of its sales and distribution channels in order
to respond to changes in market demand. In addition, the Company believes that
its administrative cost structure has benefited from economies of scale achieved
as a result of its strategic acquisitions. The relocation of the Company's main
processing center from Ohio to the Company's headquarters in Louisville,
Kentucky, which was substantially completed during 1997, has provided benefits
of consolidation and supplemented the effective delivery of service.
MAINTAINING FOCUS ON COMPANY PROFITABILITY. The Company designs products
and manages capital with a goal of achieving a superior return on common equity.
The Company's return on average common equity (based on operating earnings and
equity before unrealized gains and losses and for 1997, giving pro forma effect
to the Company's June 1997 initial public offering of common stock) was 17.0% in
1998 and 16.4% in 1997. The Company's focus on profitability is supported by an
integrated team approach to developing products and operating the Company's
business. The Company's compensation system further reinforces the Company's
focus on the objective of profitability. Employees at all levels of the Company
are eligible to receive bonuses based on profitability. As of March 9, 1999,
executive officers held shares and options to purchase shares representing 8.0%
of the Company's outstanding common stock and options.
The Company, a Delaware corporation, conducts its business through the
following subsidiaries:
- INTEGRITY LIFE INSURANCE COMPANY ("INTEGRITY") - provides individual
fixed, indexed and variable annuities to retail customers and funding
agreements and GICs to institutional customers;
- NATIONAL INTEGRITY LIFE INSURANCE COMPANY ("NATIONAL INTEGRITY") -
provides individual fixed and variable annuities to retail customers,
primarily in New York (wholly owned subsidiary of Integrity, and
collectively, the "Integrity Companies");
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- ARM FACE-AMOUNT CERTIFICATE GROUP, INC.("ARMFAC") - offers
certificates to institutional customers through its special purpose
entity subsidiaries (currently 312 Certificate Company and 212
Certificate Company);
- SBM CERTIFICATE COMPANY - offers retail face-amount certificates
which guarantee a fixed rate of return to investors at a future
date. Retail face-amount certificates are similar to bank-issued
certificates of deposit but are regulated by the Investment
Company Act of 1940, as amended (the "Investment Company Act")
and are not subject to Federal Deposit Insurance Corporation
("FDIC") protection; and
- ARM SECURITIES CORPORATION ("ARM SECURITIES") - supports, as a
broker-dealer, the Company's retail annuity operations and the
Company's sales of independent third-party mutual funds.
HISTORY
INTEGRITY COMPANIES
The Company was established in July 1993 by The Morgan Stanley Leveraged
Equity Fund II, L.P. ("MSLEF II"), an investment fund sponsored by Morgan
Stanley Group Inc. (now known as Morgan Stanley Dean Witter & Co.), and
Analytical Risk Management, Ltd. to acquire Integrity Holdings, Inc. (formerly
N.M. U.S. Limited) from The National Mutual Life Association of Australasia
Limited ("National Mutual"). In connection with the acquisition, which occurred
on November 26, 1993, National Mutual provided the Integrity Companies with
indemnification as to future claims for taxes, assessments from guaranty funds,
and claims from litigation, which arose from preclosing events.
SBM COMPANY
In June 1995, the Company completed the acquisition of substantially all of
the assets and business operations of SBM Company ("SBM"), including all of the
issued and outstanding capital stock of SBM's subsidiaries, State Bond and
Mortgage Life Insurance Company ("SBM Life") (which was subsequently merged with
and into Integrity to create certain operating efficiencies), SBM Financial
Services, Inc. (which subsequently changed its name to ARM Securities
Corporation), SBM Certificate Company, and SBM's management contracts with six
mutual funds (the "State Bond Mutual Funds"). The aggregate purchase price for
the SBM acquisition was $38.8 million. To fund the acquisition and make a $19.9
million capital contribution to SBM Life, the Company issued approximately 6.9
million shares of common stock primarily to Morgan Stanley Capital Partners III,
L.P., Morgan Stanley Capital Investors, L.P., and MSCP III 892 Investors, L.P.
(together with MSLEF II, the "Morgan Stanley Stockholders"), for an aggregate
sale price of $63.5 million. The Company subsequently determined that the State
Bond Mutual Funds were not a strategic line of business for the Company and on
December 13, 1996, the Company transferred its contracts to perform management
and advisory services for the State Bond Mutual Funds to Federated Investors for
$4.5 million. The State Bond Mutual Funds had aggregate assets of $236.9 million
on December 13, 1996.
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INITIAL PUBLIC OFFERING OF COMMON STOCK
In June 1997, the Company completed an initial public offering of 9.2
million shares of its Class A common stock, of which 5.75 million shares were
sold by the Company and 3.45 million shares were sold by the Morgan Stanley
Stockholders. The net proceeds of the offering to the Company were $78.8
million, after deducting underwriting discounts and commissions and other
expenses payable by the Company. On June 30, 1997, the Company used $40 million
of such net proceeds to make a capital contribution to its primary insurance
subsidiary, Integrity, thereby strengthening Integrity's capital base to provide
for future growth. The Company is using the remaining net proceeds from the
offering for general corporate purposes.
Concurrent with its initial public offering, the Company amended and
restated its Certificate of Incorporation to effectuate a recapitalization such
that, in addition to certain other changes, each share of common stock was split
into 706 shares of common stock. The Morgan Stanley Stockholders owned
approximately 91% of the outstanding shares of the Company's common stock prior
to the offering and approximately 53% following the offering.
SECONDARY PUBLIC OFFERING
In May 1998, the Company completed a secondary public offering of
approximately 12.4 million shares of common stock held by the Morgan Stanley
Stockholders. The Company did not receive any of the proceeds as a result of the
secondary offering. However, the secondary offering of common stock resulted in
the Morgan Stanley Stockholders' complete divestiture of its interest in the
Company and all Class B common stock was converted to Class A common stock.
ARM FACE-AMOUNT CERTIFICATE GROUP, INC.
ARMFAC was formed in 1998, as a wholly owned subsidiary of the Company, to
issue privately placed institutional certificates. ARMFAC has subsequently
established two wholly owned subsidiaries, 312 Certificate Company ("312 CC")
and 212 Certificate Company ("212 CC"), both bankruptcy-remote, special purpose
corporations. On April 24, 1998, 312 CC completed the sale of a $500 million
privately placed certificate to a large institutional purchaser. On September
24, 1998, 212 CC completed the sale of a $500 million privately placed
certificate to another large institutional purchaser.
PREFERRED STOCK OFFERING
In July 1998, the Company completed a $75 million offering of Series A
Fixed/Adjustable Rate Cumulative Preferred Stock ("Series A Preferred Stock")
with an initial coupon rate of 5.575% through June 15, 2003. The net proceeds
from the sale of the Series A Preferred Stock were used to redeem the
Company's $50 million of 9.5% Cumulative Perpetual Preferred Stock on
December 15, 1998 and the remainder will be used for general corporate purposes.
PRODUCTS AND SERVICES
The Company offers a diversified array of products and services to meet the
needs of a variety of customers. The Company endeavors to adapt its products to
respond to changes in the retail and institutional marketplace and generally
seeks to have "a product for every market environment." The Company's retail
products include a variety of variable, indexed and fixed annuities and
face-amount
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certificates. The Company's retail variable annuity products offer customers
participation in various investment portfolios, some of which are offered
exclusively by the Company's insurance subsidiaries. The Company also offers
funding agreements, certificates and GICs to its institutional clients.
The Company derives its earnings from the net investment spread and fee
income generated by the assets it manages. With retail and institutional spread
products, the Company's subsidiaries agree to return customer deposits with
interest at a specified rate or based on a specified index (e.g., LIBOR, S&P
500-both defined below). As a result, the Company's subsidiaries accept
investment risk in exchange for the opportunity to achieve a spread between what
the Company earns on invested assets and what it pays or credits on customer
deposits. With retail variable products, the Company's subsidiaries receive a
fee in exchange for managing deposits, and the customer accepts investment risk
associated with their chosen mutual fund option. Because the investment risk is
borne by the customer, this business requires significantly less capital support
than spread-based business.
RETAIL AND INSTITUTIONAL SPREAD PRODUCTS
The Company seeks to limit the volatility of investment spreads in a
variety of interest rate environments. To this end, management (i) structures
investment asset durations, convexity and liquidity characteristics in relation
to the Company's experience of customer deposit characteristics; (ii) regularly
trades investment assets to improve yield; (iii) offers an array of products
whose credited rates are based on differing points on the yield curve; and (iv)
actively manages the trade-off between credited rates and persistency.
The Company's retail and institutional spread products include retail
guaranteed rate options ("GROs") sold as a stand-alone product or as an
investment option within variable annuity contracts, systematic transfer options
("STOs") of certain annuity contracts, flexible premium deferred annuity
("FPDA") contracts, single premium deferred annuity ("SPDA") contracts, retail
face-amount and institutional certificates, and institutional funding agreements
and GICs as described below. Sales of such products include premiums and
deposits received for products offered through the Company's subsidiaries.
Sales of such retail and institutional spread products for the years ended
December 31, 1998, 1997 and 1996 were as follows:
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<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
(IN MILLIONS) 1998 1997 1996
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<S> <C> <C> <C>
Retail spread product sales:
GRO $ 31.8 $ 305.6* $ 63.8
STO 65.6 16.8 16.9
FPDA:
Equity-indexed 32.6 4.8 0.4
Other 7.0 10.5 17.5
SPDA 0.1 0.7 3.7
Face-amount certificates 15.9 9.8 8.0
Other 1.2 0.7 0.5
----------------------------------
Total retail spread products 154.2 348.9 110.8
Institutional spread product sales:
Funding agreements and GICs 1,515.5 1,708.7 747.5
Institutional certificates 1,000.0 - -
----------------------------------
Total institutional spread product sales 2,515.5 1,708.7 747.5
----------------------------------
Total sales of spread products $2,669.7 $2,057.6 $ 858.3
----------------------------------
----------------------------------
</TABLE>
*The increase in 1997 was a result of a brief increase in market interest
rates early in 1997 which made the product more attractive.
Assets under management for retail and institutional spread products at
December 31, 1998, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
December 31,
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1998 1997 1996
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Percent Percent Percent
(DOLLARS IN MILLIONS) Amount of Total Amount of Total Amount of Total
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Retail spread products and options:
GRO $ 584.3 7.5% $ 558.2 10.4% $ 223.1 6.3%
FPDA 406.7 5.2 403.2 7.5 428.1 12.1
SPDA 567.9 7.3 698.9 13.0 838.2 23.7
Single Premium Immediate Annuity ("SPIA") 659.3 8.4 654.4 12.2 650.1 18.4
Single Premium Endowment ("SPE") 373.8 4.8 383.3 7.2 396.7 11.2
STO 125.0 1.6 30.3 0.6 6.7 0.2
Face-amount certificates 34.1 0.4 45.1 0.8 50.2 1.4
Other 46.0 0.6 47.2 0.9 53.1 1.5
-----------------------------------------------------------------
Total retail spread products and options 2,797.1 35.8 2,820.6 52.6 2,646.2 74.8
Institutional spread products:
Funding agreements and GICs 4,014.2 51.4 2,542.3 47.4 891.9 25.2
Institutional certificates 1,004.8 12.8 - - - -
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Total institutional spread products 5,019.0 64.2 2,542.3 47.4 891.9 25.2
-----------------------------------------------------------------
Total assets under management for spread products $7,816.1 100.0% $5,362.9 100.0% $3,538.1 100.0%
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</TABLE>
GUARANTEED RATE OPTIONS. Guaranteed rate options provide a fixed-rate
investment alternative. GROs, which were first introduced by the Company's
insurance subsidiaries in 1994, allow customers to lock in a fixed return for
three, five, seven, or ten years. There are no up-front or annual
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fees attached to these options, but surrender charges apply to withdrawals in
excess of a stated maximum. Funds may be transferred to or from any of the
guaranteed interest rate periods (or other investment options within the
variable annuity contract) subject to a market value adjustment ("MVA"). The MVA
can be either positive or negative, but the customer is guaranteed principal by
the issuing insurance company plus a return of 3%, before surrender charges.
Transfers at the end of a guarantee period are not subject to the MVA provision.
The MVA provision is intended to offset the gain or loss attributable to the
impact of changes in interest rates on the market value of assets that would be
sold to fund surrenders occurring prior to the end of the guarantee period. The
Company currently uses an immunized investment strategy designed to achieve a
target dollar amount over the selected time horizon despite interest rate
volatility, while maintaining a tight duration match between the assets in the
portfolio and the customer deposits they support. Deposits into GROs are held in
a guaranteed separate account established by the insurance company.
SYSTEMATIC TRANSFER OPTIONS. The systematic transfer option is available
in stand-alone GRO, variable annuity and equity-indexed products offered by the
Company's insurance subsidiaries. It provides a guaranteed interest rate and
contributions to STOs must be transferred to other investment options within one
year. The guaranteed interest rate is generally set higher than other
short-term rates guaranteed by the Company in order to attract new deposits.
The option also provides for dollar-cost-averaging as contributions are
systematically transferred to other product options.
FLEXIBLE PREMIUM DEFERRED ANNUITY CONTRACTS. Under flexible premium
deferred annuity contracts, the issuing insurance company guarantees the
customer's principal and credits the accumulated deposit with a rate of interest
that is guaranteed for a specified initial period and reset annually or
semi-annually thereafter. FPDA contract holders can make additional
contributions, subject to minimums, after the contract is issued. The Company
generally determines the crediting rate by reference to current yields along the
intermediate term section of the yield curve. Certain FPDA contracts, which were
acquired as a result of the SBM acquisition and which are not currently marketed
by the Company, are qualified under section 403(b) of the Internal Revenue Code
of 1986, as amended, and were sold to qualified employers such as public school
districts and churches. The Company developed a new FPDA product, OMNI, in 1995,
with sales commencing in February of 1996 and developed a second generation
equity-indexed product, OMNISELECT, in 1997. The OMNI and OMNISELECT products
furnish customers with the ability to allocate assets among equity index-based
returns and guaranteed rates of return. The index-based options offer upside
potential tied to a percentage of the appreciation in the S&P 500 Composite
Stock Price Index ("S&P 500"), but protect the customer against the related
downside risk through a guarantee of principal by the issuing insurance company.
By hedging the equity-based risk component of the product through the purchase
of futures contracts or other investment strategies, the Company focuses on
managing the interest rate spread component.
SINGLE PREMIUM DEFERRED ANNUITY CONTRACTS. Under single premium deferred
annuity contracts, the issuing insurance company guarantees the customer's
principal and credits the accumulated deposit with a rate of interest that is
guaranteed for a specified initial period and reset annually or semi-annually
thereafter, subject to guaranteed minimum crediting rates set forth in the
contracts (currently 3% or 4%). The Company generally determines the crediting
rate by reference to current yields along the intermediate term section of the
yield curve. No front-end sales charges are imposed
11
<PAGE>
for purchases of such contracts, but all contain surrender charges for
withdrawals in excess of a specified amount during the surrender charge period.
These surrender charges vary depending upon the guarantee periods in the
contracts. As a result of changes in the marketing environment for this product
and the increased competition in pricing, the Company did not actively market
this product in recent years. However, the Company has resumed, to a limited
extent, the marketing of this type of product in 1999.
SINGLE PREMIUM IMMEDIATE ANNUITY CONTRACTS. Single premium immediate
annuity contracts were historically marketed by the Company to insurance
companies and defendants in connection with lawsuits involving structured
liability settlements. As a result of changes in the marketing environment for
this product and the increased competition in pricing, the Company's insurance
subsidiaries are not currently focusing on this segment of the immediate annuity
marketplace. SPIA contracts provide guaranteed payments to contract holders and
are not subject to surrender. Pricing is determined by reference to the
long-term end of the yield curve.
SINGLE PREMIUM ENDOWMENT CONTRACTS. While single premium endowment
contracts continue to represent a portion of the Company's insurance
subsidiaries' business in force, as a result of changes in applicable tax laws,
the Company is no longer selling this product. Under these contracts, principal
is guaranteed, and the face amount of the policy is paid upon the death of the
insured. The contracts are credited with a specified rate of interest that is
guaranteed for a period of time and then reset annually thereafter, subject to
guaranteed minimums and certain other restrictions. The Company generally
determines the crediting rate by reference to current yields along the
intermediate term section of the yield curve. Due to changes in applicable tax
laws, and the consequential loss of tax benefits associated with SPEs in the
event of a withdrawal, the Company believes that the level of surrenders of SPEs
associated with increases in interest rates will be lower than would otherwise
be the case.
RETAIL FACE-AMOUNT CERTIFICATES. Face-amount certificates are obligations
of SBM Certificate Company which require it to pay holders the original invested
amount of the certificate, plus a three-year fixed-rate return, at a given
maturity date. Holders are required to accept a reduced rate of interest if they
withdraw their investment prior to the maturity date. The Company determines the
interest rate offered on face-amount certificates based on the short to
intermediate term sections of the yield curve. Face-amount certificates, which
are similar to bank certificates of deposit, generally compete with various
types of individual savings products offered by banks and insurance companies
that provide a fixed rate of return on investors' money. Face-amount
certificates are regulated under the Investment Company Act and, unlike bank
certificates of deposit of less than $100,000, are not guaranteed by the FDIC.
The Company continues to evaluate its strategy with regard to its face-amount
certificate retail distribution channels.
FUNDING AGREEMENTS AND GUARANTEED INVESTMENT CONTRACTS. Funding agreements
and guaranteed investment contracts are issued by the Company to institutional
customers primarily through a marketing partnership with General American.
Funding agreements are investment contracts issued by the Company's insurance
subsidiaries to the nonqualified (i.e., non-retirement plans) market, and GICs
are issued by the Company's insurance subsidiaries to qualified pension plans.
The marketing partnership with General American currently permits the Company to
use its established distribution channel contacts to market funding agreements
and GICs that are backed by the financial strength
12
<PAGE>
of General American (see "--Ratings and Rating Agencies"). The Company markets
General American contracts which have been designed by the Company to meet
customer needs. Since September 1995, General American has ceded 50% of new
deposits to Integrity under a coinsurance agreement. Sales of funding agreements
and GICs made through General American accounted for 49% and 48% of total retail
and institutional sales for the years ended December 31, 1998 and 1997,
respectively. The interest rate on funding agreements and GICs is typically
based upon a short-term floating rate, such as the London Interbank Offered Rate
("LIBOR"), which periodically resets to provide current yields. Funding
agreement and GIC products offered by the Company are designed and have
historically been held by customers as long-term core cash investments, even
though under most contracts customers have the option to liquidate their
holdings mainly in seven days, ranging to ninety days, with written notice. The
Company has experienced withdrawals (excluding scheduled interest payments) by
funding agreement and GIC customers of approximately 1.6% and 4.5% of average
funding agreement and GIC customer deposits for the years ended December 31,
1998 and 1997, respectively. The Company also broadened its institutional
product lines and distribution channels by launching a new funding agreement
product. In November 1997, the Company received a deposit of $500 million for
the new product, which was sold in partnership with BLB and initially matures in
five years and is renewable annually thereafter.
INSTITUTIONAL CERTIFICATES. Institutional certificates, introduced in 1998,
are obligations of the subsidiaries of ARMFAC (currently 312 CC and 212 CC)
which require them to pay the certificate holder the original invested amount,
plus interest. The interest rate is based upon LIBOR and resets each month.
312 CC and 212 CC were established as special-purpose entities to offer these
privately placed certificates.
RETAIL VARIABLE PRODUCTS
The Company's retail variable products business is less capital intensive
than spread business and generally provides the Company with a diversified
source of income, due to the relative insensitivity of fee-based income to
changes in interest rates. However, significant decreases in price levels in the
securities market could adversely affect sales and the level of fee income
earned by the Company from variable annuities and, thereby, the Company's
results of operations.
13
<PAGE>
The Company's retail variable products include the mutual fund options of
variable annuity contracts, as well as STOs and GROs. Sales of such products
represent premiums and deposits received. Sales of retail variable products for
years ended December 31, 1998, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
(IN MILLIONS) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Retail variable product sales:
Fund options $ 285.7 $ 181.2 $ 194.8
Spread options:
STO 110.8 41.8 5.3
GRO 3.9 16.9 19.8
------------------------------
Total spread options 114.7 58.7 25.1
------------------------------
Total sales of retail variable products $ 400.4 $ 239.9 $ 219.9
------------------------------
------------------------------
</TABLE>
Assets under management for retail variable fund options at December 31,
1998, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------
(IN MILLIONS) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Retail variable fund options assets under $1,606.9 $1,129.1 $844.3
management ------------------------------
------------------------------
</TABLE>
VARIABLE ANNUITY CONTRACTS. Under variable annuity contracts, customers
may allocate all or a portion of their account values to a nonguaranteed
separate account that invests in shares of one or more investment portfolios
(registered investment companies). Values in the nonguaranteed separate account
will vary with the investment performance of the underlying mutual fund. The
Integrity Companies receive income in the form of mortality and expense fees
based primarily on the market value of the invested deposits, administrative
expense charges in connection with variable annuity contract deposits and fees
received from the investment adviser of the underlying mutual funds for services
provided. The Company reinsures most of the mortality risk associated with its
existing variable annuity contracts. The Integrity Companies also receive spread
income from deposits allocated to the Company's STO and GRO products. Because
the investment risk under the fund options of variable annuity products is borne
by the customer, these products are treated as securities under federal
securities laws and, therefore, the salespeople are both appointed as insurance
agents for the Company's insurance subsidiaries and registered as securities
representatives. In addition, Integrity Capital Advisors, Inc. earns fee income
by serving as an advisory manager and by providing supervisory and
administrative services to the portfolios of The Legends Fund, Inc. ("Legends
Fund"), a registered investment company. Shares of The Legends Fund are offered
only to nonguaranteed separate accounts of Integrity and National Integrity.
14
<PAGE>
DISTRIBUTION
RETAIL DISTRIBUTION
The Company's retail distribution strategy is focused on "making it easier"
for producers and customers to do business with us by providing superior
products, technology and service. By successfully implementing this strategy,
the Company believes that it can expand its distribution and gain additional
market share in the highly competitive retail annuity market. During 1998, the
Company made significant progress in the individual variable annuity market by
increasing sales 66.9% over 1997, compared with an increase of 12.2% for
industry variable annuity sales (according to sales information compiled by
Variable Annuities Research and Data Service ("VARDS")). This increase resulted
in The Integrity Companies being ranked No. 45, based on sales, among the top
variable annuity companies for the year ended December 31, 1998 compared with
No. 52 for the year ended December 31, 1997 (according to VARDS).
In providing attractive products, the Company works closely with its
producers to enhance its existing products and develop new products that are
customized to meet the needs of customers in each distribution channel. The
Company utilizes a streamlined product development process designed to enable
the Company to respond quickly to changes in the marketplace and reduce the time
required to introduce new or enhanced products. For example, PINNACLE, the
Company's multi-manager variable annuity product was one of the first in the
industry to offer Bankers Trust indexed funds, along with a diverse selection of
asset classes from well-known fund managers, guaranteed rate options, and the
ability for systematic transfer of deposits over time - all in one product. In
1998, the Company further enhanced PINNACLE by introducing a "Dogs of the Dow"
investment option called SELECT TEN PLUS. This new investment option allows
customers to invest in the top ten dividend-yielding stocks in the Dow Jones
Industrial Average on a tax-deferred basis. These enhancements have attracted
new producers and resulted in PINNACLE being the fastest growing variable
annuity for products introduced prior to 1997 (based on the growth in sales for
1998 over 1997 according to VARDS).
The Company believes that the World Wide Web will become an important
vehicle for conducting business in the financial services industry.
Accordingly, our strategy for expanding retail distribution is focused on
AnnuiTRAC-SM-, the Company's Internet-based producer service program introduced
in 1997. During 1998, the Company expanded this program to service over 500
producers. The Company believes that the convenience and ease of using this
system will help attract and retain additional producers. AnnuiTRAC-SM- uses
Web-based technology to provide producers with on-line access to policy and
product information, 24 hours a day, seven days a week. Not only does this
system automate account processing, but it helps the Company meet the demands of
a growing sales force without significantly increasing operating costs. Using
this technology, producers can devote more time to selling new business and the
Company spends less time processing the paperwork. Previously, when producers
needed the status on pending accounts, historical transaction data, or product
summaries, they requested the information from the Company's producer services
unit and received it via facsimile or mail. With AnnuiTRAC-SM-, this process is
simplified with an interactive software system. Producers can now find valuable
account information immediately and directly by accessing AnnuiTRAC-SM- through
the Internet. Also in 1998, to further reinforce its belief in the importance
of the Internet in business commerce, the Company introduced cutting-edge
technology that allows producers to submit new business on-line,
15
<PAGE>
creating a near paperless environment and reducing transaction processing time.
To strengthen relationships with existing producers and assist in
recruiting new producers, the Company continues to enhance its in-house
capability to provide service to producers and to promote the Company's products
and services. Company representatives directly servicing producers have
immediate system response capabilities for virtually any service request through
the Company's PC-based client/server system. Service requests can also be
turned into sales opportunities by keeping producers informed of new product
features and current rate and performance information. In addition, through
this servicing group, the Company works with producers and customers to retain
existing business. Based on input from producers and customers, the Company
introduced in late 1998 a completely revised statement of account. These
statements were redesigned to make them easier for producers and customers to
read and understand and include color charts on customers' asset allocation and
other important information.
In July 1998, the Company recruited a highly experienced team of
wholesalers to focus on expanding sales in the independent agent market in New
York. These employees generated over 860 new contracts, over $30 million in
business and attracted over 170 new producers through December 31, 1998. In
fact, 90% of the business attributed to this group came from producers who had
never sold the Company's products in the past. In 1999, the Company is
considering plans to leverage this experience by setting up similar operations
in other states.
In March 1999, the Company signed a letter of intent to acquire the assets
and operations of Financial Marketing Group, Inc., FMG Distributors, Inc. and
FMG Advisors, Inc. (collectively, "FMG"). Upon completion of this transaction,
the Company will significantly expand its in-house retail distribution
capabilities and secure this distribution company. When completed, the
acquisition of FMG will enhance the Company's ability to penetrate the
broker-dealers market by providing the Company with direct access to over 350
broker-dealer firms. The acquisition will also significantly enhance in-house
efforts to provide quality service to the broker-dealers selling our fixed and
variable annuity products. The combination of FMG's sales desk operations with
the Company's operations expand distribution capabilities, enhance the Company's
ability to promote products, and support the Company's efforts to serve
producers. It is anticipated that the closing of the acquisition, which is
subject to the final terms of the purchase agreement and certain conditions,
will take place in the second calendar quarter of 1999.
FMG has served as a third-party marketing organization for the Company with
sales networks to distribute certain of its retail annuity products. FMG
supplemented the Company's in-house wholesaling unit by performing this function
for certain independent broker-dealers. Broker-dealers affiliated with FMG
accounted for 65% and 45% of total retail sales, and 12% and 11% of total retail
and institutional sales, for the years ended with December 31, 1998 and 1997,
respectively. No individual broker-dealer affiliated with FMG accounted for more
than 2% and 9% of total retail sales for the years ended December 31, 1998 and
1997, respectively. In addition to FMG, the Company utilizes PaineWebber
Incorporated ("PaineWebber") in the stockbroker channel for the distribution of
certain products. For the years ended December 31, 1998 and 1997, approximately
11% and 13% of the Company's total retail sales, respectively, and
approximately 2% and 3% of total retail and institutional sales, respectively,
were made through PaineWebber.
16
<PAGE>
Retail sales by distribution channel for the years ended December 31, 1998
and 1997 were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1998 1997
--------------------------------------------
Percent Percent
(DOLLARS IN MILLIONS) Amount of Total Amount of Total
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Distribution channel:
Independent broker-dealers $390.8 70% $286.5 49%
Independent agents 82.0 15 199.8 34
Stockbrokers 72.0 13 93.8 16
Financial institutions 9.7 2 8.7 1
--------------------------------------------
Total retail sales $554.5 100% $588.8 100%
--------------------------------------------
--------------------------------------------
</TABLE>
INSTITUTIONAL DISTRIBUTION
In the institutional markets, the Company has been able to generate a
significant level of sales volume with relatively minimal overhead or marketing
expenses. A small team of in-house, experienced marketing and product
development professionals design, market and sell the Company's products which
are distributed directly to defined contribution plans, bank collective trust
departments, GIC investment managers, money market funds, corporate treasurers,
and other institutional investors. Utilizing these professionals, the Company
has been able to gain significant leverage in the amount of revenue and profit
which can be generated by these individuals for the limited amount of overhead
required to maintain and expand its market penetration. Where the Company's
financial strength ratings constrain its ability to underwrite and sell products
directly, the Company's in-house institutional staff structures arrangements
with highly-rated and respected partners to credit enhance the performance
guarantees of its products.
SURRENDERS
To encourage persistency and discourage withdrawals, the Company's retail
insurance products have generally incorporated surrender charges, market value
adjustments and/or other features which may discourage or prevent such
surrenders or withdrawals for a specified number of years. As of December 31,
1998, the Company had approximately $806.7 million of retail customer deposits
(18% of total retail customer deposits), which were not subject to surrender
charges or other restrictions on withdrawal. During 1999, surrender charges will
no longer apply to an additional $329.9 million of retail customer deposits
which were in force as of December 31, 1998. The Company has implemented
programs designed to improve persistency. Such programs involve direct contact
with customers and are designed to inform customers of the financial strength of
the Company and its insurance subsidiaries and to describe other retail product
offerings available.
As of December 31, 1998, the Company had approximately $3.5 billion of
institutional customer deposits (70% of total institutional customer deposits),
which were subject to short-term withdrawal restrictions, primarily requiring
seven days, but ranging to 90 days, written notice.
17
<PAGE>
For additional information related to surrender risks see "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Results of Operations -- 1998 Compared to 1997; -- Liquidity and Financial
Resources -- Insurance Subsidiaries Operations; and -- Effects of Inflation and
Interest Rate Changes."
REINSURANCE CEDED
The Company's insurance subsidiaries reinsure risks related to certain of
its products with other insurance companies through reinsurance agreements.
Through these reinsurance agreements, substantially all mortality risks
associated with SPE and variable annuity deposits and substantially all risks
associated with the variable life business have been reinsured. The Company's
primary reinsurers of mortality risks associated with SPE deposits are Swiss
Reinsurance Company, RGA Reinsurance Company and The Equitable Life Assurance
Society, which are respectively rated A+, A+ and A by A.M. Best. Connecticut
General Life Insurance Company is the Company's principal reinsurer of the
mortality risks associated with variable annuity deposits and is rated A+ by
A.M. Best. Phoenix Home Life Mutual and American Franklin Life are the Company's
principal reinsurers with respect to risks associated with the variable life
business and are respectively rated A and A++ by A.M. Best. In addition,
Integrity cedes a block of SPDAs on a coinsurance basis to Harbourton
Reassurance, Inc., and in accordance with the treaty all assets supporting the
liabilities are held in trust. Reinsurance does not fully discharge the
Company's obligation to pay policy claims on the reinsured business; the ceding
reinsurer remains responsible for policy claims to the extent the reinsurer
fails to pay such claims.
RATINGS AND RATING AGENCIES
Insurance companies are rated by independent rating agencies to provide
both industry participants and insurance consumers meaningful information on
specific insurance companies. Higher ratings generally indicate a higher
relative level of financial stability and a stronger ability to pay claims. In
general, the rating agencies issue opinions on the insurance companies'
abilities to meet policyholder claims and obligations on a timely basis. The
basis for an opinion on a particular rating includes such factors as capital
resources, financial strength, demonstrated management expertise, and stability
of cash flow as well as the quality of investment operations, administration and
marketing. These particular types of ratings are based upon factors relevant to
policyholders and are not directed toward protection of stockholders. Such
ratings are neither a rating of securities nor a recommendation to buy, hold or
sell any security. The Company's insurance subsidiaries currently hold ratings
from four significant rating agencies: A.M. Best, Standard & Poor's Corporation
("S&P"), Duff & Phelps, and Moody's Investors Service ("Moody's").
The Company's insurance subsidiaries are currently classified "A
(Excellent)" by A.M. Best Company, Inc. ("A.M. Best"), reflecting an upgrade
from A- in October 1995. A.M. Best's ratings range from "A++ (Superior)" to "F
(In liquidation)," and some companies are not rated.
The Company's insurance subsidiaries currently hold an "A (Strong)"
claims-paying ability rating from S&P. The S&P claims-paying ability rating
categories range from "AAA (Extremely Strong)" to "D (Liquidation)."
18
<PAGE>
In addition, the Company's insurance subsidiaries currently hold an "A-1
(Strong)" short-term rating from S&P. The short-term rating is used for any
obligation whose maturity is typically one year or less or would apply to a put
option or demand feature which would give the policyholder the right to receive
their funds within one year. The S&P short-term rating categories range from
"A-1+ (Very Strong)" to "C (Currently Vulnerable)."
The Company's insurance subsidiaries currently have a claims-paying ability
rating from Duff & Phelps of "A+ (High)" and a short-term claims paying ability
of "D-1." Duff & Phelps' claims-paying ability ratings range from "AAA" to "DD"
and short-term claims-paying ability ratings range from "D-1+" to "D-5".
Moody's has assigned the Company's insurance subsidiaries a "Baa1
(Adequate)" insurance financial strength rating. This rating was reaffirmed by
Moody's in November 1998, but with a negative outlook on the Company. Moody's
ratings range from "Aaa (Exceptional)" to "C (Lowest)," and some companies are
not rated.
Customers and many financial institutions and broker-dealers tend to focus
on the A.M. Best ratings of an insurer in determining whether to buy or market
the insurer's annuities. If any of the Company's ratings were downgraded from
their current levels or if the ratings of the Company's competitors improved and
the Company's did not, the ability of the Company to distribute its products and
the persistency of its existing business could be adversely affected. Each of
the rating agencies reviews its ratings periodically, and there can be no
assurance that the Company's current ratings will be maintained in the future.
A substantial portion of the Company's institutional business is written on
General American's policy forms and reinsured to the Company. General
American's ratings are (i) A.M. Best -- "A+ (Superior);" (ii) S&P claims-paying
ability -- "AA- (Very Strong)" and short-term -- "A-1+ (Strong);" (iii) Duff &
Phelps claims-paying ability -- "AA (Very High)" and short-term claims paying
ability -- "D-1+;" and (iv) Moody's insurance financial strength rating -- "A2
(Good)."
General American's Moody's rating of A2 reflects a lowering from A1 which
Moody's announced on March 5, 1999. Moody's recent rating of General American,
and its rating of the Company, reflects in part, Moody's overall outlook for the
U.S. life insurance industry, which remains negative. According to Moody's, the
fundamental issues underpinning its view of the industry continue to be intense
competition, excess capacity, eroding financial service barriers, and market
conduct litigation, among others. These issues are likely to continue to
pressure Moody's ratings of U.S. life insurers over the medium term. There is
no assurance that Moody's lowering of General American's rating will not have an
adverse effect on the Company's financial position or results of operations. In
addition, there is no assurance that further reductions of General American's
ratings would not have a material adverse effect on the Company's financial
position or results of operations.
19
<PAGE>
PRODUCER AND CUSTOMER SERVICE, TECHNOLOGY AND ADMINISTRATION
The Company believes that it can strategically employ technology to
strengthen individual distributor and customer relationships by providing
superior service, reducing operating costs, improving work flow efficiency, and
reducing product development time.
The Company's integrated approach to business requires that information be
shared within and across functional groups. Management, therefore, believes that
a PC-based client/server data processing platform provides users with direct
access to information more efficiently than a mainframe system. To facilitate
this process, the Company's principal locations in Kentucky, Ohio, New York, and
Minnesota use linked voice and data communications technologies over a wide-area
network ("WAN"). With proper security clearance, employees can access data bases
on file servers from any location. Some of these file servers are owned and
operated by the Company, while others are owned and operated by external
entities. Using an automated interface system to access these data bases, the
Company achieves reduced costs, strengthened internal control, and decreased
possibility for error from manual intervention. The Company has and will
continue to outsource systems or administrative functions in which the Company
does not currently possess or have the potential for critical mass. The Company
improved the productivity and effectiveness of its processing operations by
relocating and consolidating its Ohio office to the corporate headquarters in
Louisville, Kentucky.
The Company maintains a plan to promptly recover its systems and operations
in the event of a disaster. For critical WAN applications, redundant servers
with backed-up data are in place. Key functions are intended to be available
within a matter of a few hours. For recovery of computer systems accessed
through external parties, these vendors provide their own disaster recovery
plans. Off-site storage of magnetic media is intended to ensure that data
processing systems and the imaging system can also be restored in the event of a
disaster.
The Company believes that the World Wide Web will become an important
vehicle for conducting business in the financial services industry. In 1997, the
Company introduced its Internet-based producer service program called
AnnuiTRAC-SM-. During 1998, the Company expanded this program to service over
500 producers. The Company believes that the convenience and ease of using
this system will help attract and retain additional producers. AnnuiTRAC-SM-
uses Web-based technology to provide producers with on-line access to policy and
product information, 24 hours a day, seven days a week. Not only does this
system automate account processing, but it also helps the Company meet the
demands of a growing sales force without significantly increasing operating
costs. Using this technology, producers can devote more time to selling new
business and the Company spends less time processing the paperwork. Previously,
when producers needed the status on pending accounts, historical transaction
data, or product summaries, they requested the information from the Company's
producer services unit and received it via facsimile or mail. With
AnnuiTRAC-SM-, this process is simplified with an interactive software system.
Producers can now find valuable account information immediately and directly by
accessing AnnuiTRAC-SM- through the Internet. Also in 1998, to further
reinforce its belief in the importance of the Internet in business commerce, the
Company introduced cutting-edge technology that allows producers to submit new
business on-line, creating a near paperless environment and reduced transaction
processing time.
20
<PAGE>
The Company also uses technology to decrease the amount of time it takes to
develop new products. Accordingly, during 1998, in an attempt to focus a more
concentrated effort on enhancing technology development, the Company established
ARM Technology Group. The goals of the group are to strengthen the Company's
technology capabilities and increase the efficiency of in-house operations.
Additionally, in 1997, the Company developed an improved policy administration
system that allows it to quickly respond to changing customer needs and reduces
the amount of time required to modify software necessary to implement new
product features. The Company envisions using this system to support various
aspects of its business in the future.
COMPETITION
The financial services industry is highly competitive, and each of the
Company's subsidiaries competes with companies that are significantly larger and
have greater access to financial and other resources.
The life insurance industry comprises approximately 1,800 companies in the
United States and is highly competitive, with no one company dominating any of
the principal markets in which the Company's insurance subsidiaries operate.
Many insurance companies and insurance holding companies have substantially
greater capital and surplus, larger and more diversified portfolios of life
insurance policies and annuities, higher ratings, and greater access to
distribution channels than the Company's insurance subsidiaries. Competition is
based upon many factors, such as the form and content of annuity policies,
premiums charged, investment return, customer and producer service, access to
distribution channels, financial strength and ratings of the company,
experience, and reputation. The Company's insurance subsidiaries also encounter
increasing competition from banks, securities brokerage firms, mutual funds, and
other financial intermediaries marketing insurance products, annuities and other
forms of savings and pension products.
On January 18, 1995, the United States Supreme Court held in NATIONSBANK OF
NORTH CAROLINA V. VARIABLE ANNUITY LIFE INSURANCE COMPANY that annuities are not
insurance for purposes of the National Bank Act. In addition, the Supreme Court
held on March 26, 1996 in BARNETT BANK OF MARION COUNTY V. NELSON that state
laws prohibiting national banks from selling insurance in small town locations
are pre-empted by federal law. The Office of the Comptroller of the Currency
also adopted a ruling in November 1996 that permits national banks, under
certain circumstances, to expand into other financial services, thereby
increasing potential competition for the Company. At present, the extent to
which banks can sell insurance and annuities without regulation by state
insurance departments is being litigated in various courts in the United States.
The Company believes that these developments have resulted in increased
competition from banking entities.
Laws and regulations are considered from time to time that could
significantly impact the Company's business, including proposals which, if
adopted, would result in fundamental changes in the financial services industry.
Recently, the Financial Services Act of 1999 was introduced in Congress. The
Financial Services Act of 1999 would, among other things, repeal the bank
holding company prohibitions on insurance underwriting, expand permissible
nonbanking activities for bank holding companies from those "closely related to
banking" to those that are "financial in nature" and repeal the prohibitions on
banks affiliating with securities firms. While the Company is unable to
21
<PAGE>
predict whether any such laws or regulations will be adopted, the Company
believes that any such new laws or regulations are likely to lead to increased
consolidation and competition within the financial services industry.
The principal competitive factors in the sale of annuity products are
product features, perceived stability of the insurer, customer and producer
service, name recognition, crediting rates, and commissions. The Company's
insurance subsidiaries compete in their markets with numerous major national
life insurance companies. Management believes that its ability to build market
share and compete with other insurance companies is dependent upon its ability
to expand and diversify its distribution channels and develop competitive
products with unique features and services that focus on the needs of targeted
market segments.
REGULATION
The Company's business activities are subject to extensive regulation. Set
forth below is a summary discussion of the principal regulatory requirements
applicable to the Company.
INSURANCE REGULATION
The Company's insurance subsidiaries are subject to regulation and
supervision by the states in which they are organized and in the other
jurisdictions where they are authorized to transact business. State insurance
laws establish supervisory agencies with broad administrative and supervisory
powers including granting and revoking licenses to transact business, regulation
of marketing and other trade practices, operating guaranty associations,
licensing agents, approving policy forms, regulating certain premium rates,
regulating insurance holding company systems, establishing reserve requirements,
prescribing the form and content of required financial statements and reports,
performing financial and other examinations, determining the reasonableness and
adequacy of statutory capital and surplus, regulating the type and amount of
investments permitted, limiting the amount of dividends that can be paid without
first obtaining regulatory approval, and other related matters. The primary
purpose of such supervision and regulation under the insurance statutes of Ohio
and New York (the domiciliary states of 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 recent years, the insurance regulatory framework has been placed under
increased scrutiny by various states, the federal government and the National
Association of Insurance Commissioners ("NAIC"). Various states have considered
or enacted legislation that changes, and in many cases increases, the states'
authority to regulate insurance companies. Over the past few years, the NAIC has
approved and recommended to the states for adoption and implementation several
regulatory initiatives designed to reduce the risk of insurance company
insolvencies. These initiatives include new investment reserve requirements,
risk-based capital standards and restrictions on an insurance company's ability
to pay dividends to its stockholders. Additionally, the NAIC "Codification of
Statutory Accounting Principles" project may revamp the current statutory
accounting practices for the Company's insurance subsidiaries. Certain proposals
under consideration may have a negative impact on the statutory surplus of the
Company's insurance subsidiaries and thus their ability to pay
22
<PAGE>
dividends to the Company. Issue papers were released for industry review and
Statements of Statutory Accounting Principles were issued by the NAIC in 1997,
and formally approved in 1998. Codification of Statutory Accounting Principles
is scheduled to be effective on January 1, 2001. In certain states, this project
will not undermine the states' authority to make a final determination on
acceptable and appropriate accounting practices as it may be subject to
implementation only upon legislative enactment by the applicable state
legislature. The Company is monitoring developments in the regulatory area and
assessing the potential effects that the project or any other changes would have
on the Company.
Although the federal government currently does not directly regulate the
business of insurance generally, federal initiatives can significantly affect
the insurance business. Legislation has been introduced from time to time in
Congress that could result in the federal government assuming a role in the
regulation of insurance companies. Congress and certain federal agencies are
investigating the current condition of the insurance industry in the United
States in order to decide whether some form of federal regulation of insurance
companies would be appropriate. It is not possible to predict the outcome of any
such congressional activity, which could result in the federal government
assuming some role in the regulation of the insurance industry, or the potential
effects thereof on the Company.
INSURANCE HOLDING COMPANY REGULATION. The Company and its affiliates are
subject to regulation under the insurance holding company statutes of Ohio, the
domiciliary state of Integrity, and of New York, the domiciliary state of
National Integrity, and under the insurance statutes of other states in which
the Integrity Companies are licensed to transact the business of insurance. Most
states have enacted legislation which regulates insurance holding company
systems, including acquisitions, extraordinary dividends, the terms of
transactions between affiliates including insurance companies and other related
matters. The Integrity Companies are required to file certain reports in Ohio,
New York and certain other states, including information concerning their
capital structure, ownership, financial condition, and general business
operations. The Ohio and New York insurance laws also require prior notice or
approval of changes in control of an insurer or its holding companies and of
material intercorporate transfers of assets and material agreements between an
insurer and affiliates within the holding company structure. Under the Ohio and
New York insurance laws, any person, corporation or other entity which seeks to
acquire, directly or indirectly, 10% or more of the voting securities of an Ohio
or New York insurance company or any of its parent companies is presumed to
acquire "control" of such insurance company and must obtain the prior approval
of both the Ohio Insurance Director and New York Insurance Superintendent. Prior
to acquiring such control, the proposed acquirer must either file an application
containing certain information including, but not limited to, the identity and
background of the acquirer and its affiliates and the source and amount of funds
to be used to effect the acquisition, or obtain an exemption from the approval
requirement.
In the event of a default on the Company's debt or the insolvency,
liquidation or other reorganization of the Company, the creditors and
stockholders of the Company will have no right to proceed against the assets of
Integrity or National Integrity or to cause their liquidation under federal or
state bankruptcy laws. Insurance companies are not subject to such bankruptcy
laws but are instead governed by state insurance laws relating to liquidation or
rehabilitation due to insolvency or impaired financial condition. Therefore, if
Integrity or National Integrity were to be liquidated or be the subject of
rehabilitation proceedings, such liquidation or rehabilitation
23
<PAGE>
proceedings would be conducted by the Ohio Insurance Director and the New
York Insurance Superintendent, respectively, as the receiver with respect to
all of Integrity's or National Integrity's assets and business. Under the
Ohio and New York insurance laws, all creditors of Integrity or National
Integrity, including policyholders, would be entitled to payment in full from
such assets before the Company or Integrity Holdings, Inc., as indirect or
direct stockholders, would be entitled to receive any distribution therefrom.
DIVIDEND RESTRICTIONS. The Company's ability to declare and pay dividends
is affected by Ohio and New York laws regulating the ability of National
Integrity to pay dividends to Integrity and the ability of Integrity to pay
dividends to the Company.
Under Ohio law, an Ohio domestic life insurance company may not make,
without the prior approval of the Ohio Insurance Director, dividend payments in
excess of the greater of (i) 10% of such insurance company's statutory capital
and surplus as of the preceding December 31 and (ii) such insurance company's
statutory net income for the preceding year. Under New York insurance law,
National Integrity may pay dividends to Integrity only out of its earnings and
surplus and may not distribute any dividends without at least 30 days' prior
written notice to the New York Insurance Superintendent, who may disapprove a
proposed dividend upon a determination that National Integrity's financial
condition does not warrant such distribution. Because National Integrity is a
subsidiary of Integrity, dividend payments made by National Integrity to
Integrity must be made in compliance with New York standards, and the ability of
Integrity to pass those dividends on to the Company is subject to compliance
with Ohio standards.
Integrity paid $6.0 million in dividends to the Company during 1998. For
1999, the maximum dividend payments that may be paid by Integrity to the Company
without prior regulatory approval are $37.8 million. In addition, National
Integrity paid a $2.8 million dividend to Integrity in 1998.
MANDATORY INVESTMENT RESERVE. Under NAIC rules, life insurance companies
must maintain an asset valuation reserve ("AVR"), supplemented by an interest
maintenance reserve ("IMR"). These reserves are recorded for purposes of
statutory accounting practices; they are not recorded under the provisions of
GAAP and therefore have no impact on the Company's reported results of
operations or financial position. These reserves affect the determination of
statutory surplus, and changes in such reserves may impact the ability of the
Integrity Companies to pay dividends or other distributions to the Company. The
extent of the impact of the AVR will depend upon the future composition of the
investment portfolio of the Integrity Companies. The extent of the impact of the
IMR will depend upon the extent of the gains and losses of the Integrity
Companies' investment portfolio and the related amortization thereof. Based on
the current investment portfolio of the Company's insurance subsidiaries, the
Company does not anticipate that expected provisions for the AVR and IMR will
materially adversely affect the ability of the Integrity Companies to pay
dividends or other distributions to the Company.
RISK-BASED CAPITAL REQUIREMENTS. The NAIC Risk-Based Capital ("RBC")
requirements evaluate the adequacy of a life insurance company's adjusted
statutory capital and surplus in relation to investment, insurance and other
business risks. The RBC formula is used by the states as an early warning tool
to identify potential weakly capitalized companies for the purpose of initiating
regulatory action and is not designed to be a basis for ranking the financial
strength of insurance
24
<PAGE>
companies. In addition, the formula defines a minimum capital standard which
supplements the previous system of low fixed minimum capital and surplus
requirements. The RBC requirements provide for four different levels of
regulatory attention depending on the ratio of a company's adjusted capital and
surplus to its RBC.
The consolidated statutory capital and surplus of the Company's life
insurance subsidiaries totaled $246.7 million and $211.8 million at December 31,
1998 and 1997, respectively, and were substantially in excess of the minimum
level of RBC that would require regulatory action. In addition, the consolidated
statutory AVRs of the Company's insurance subsidiaries totaled $37.8 million and
$24.9 million at December 31, 1998 and 1997, respectively. AVRs are generally
added to statutory capital and surplus for purposes of assessing capital
adequacy against various measures used by rating agencies and regulators,
including RBC.
GUARANTY FUND ASSESSMENTS. Under the insurance guaranty fund laws existing
in each state, insurers licensed to do business in the state can be assessed for
certain obligations of insolvent insurance companies to policyholders and
claimants. In connection with the acquisition by the Company of the Integrity
Companies from National Mutual, National Mutual agreed to indemnify the Company
for guaranty fund assessments levied in respect of companies declared insolvent
or subject to conservatorship prior to November 26, 1993. The amounts actually
assessed to and paid by the Company's insurance subsidiaries for the years ended
December 31, 1998, 1997 and 1996 were approximately $0.6 million, $1.6 million
and $1.5 million, respectively. Of such amounts, approximately $0.1 million,
$0.5 million and $0.5 million, respectively, were reimbursed by National Mutual
under its indemnity obligation to the Company. Because such assessments are
typically not made for several years after an insurer fails and depend upon the
final outcome of liquidation or rehabilitation proceedings, the Company cannot
accurately determine the precise amount or timing of its exposure to known
insurance company insolvencies at this time. During 1996, the Company recorded
a provision for future state guaranty fund association assessments of $1.6
million. No provision was recorded during 1997 and 1998. At December 31, 1998,
the Company's reserve for such assessments was $3.9 million. No assurance can be
given that the Company's reserve for assessments or such indemnity will be
adequate in the event of any loss suffered by the Company in respect of any
assessment made under state insurance guaranty fund laws. The reserve does not
include any provision for future assessments related to unknown failures or to
known failures for which no estimate of the Company's exposure currently can be
made. The Company estimates its reserve for assessments using information
provided by the National Organization of Life and Health Guaranty Associations.
The insolvency of large life insurance companies in future years could result in
additional material assessments to the Company by state guaranty funds that
could have a material adverse impact on the Company's future earnings and
liquidity.
TRIENNIAL EXAMINATIONS. The Ohio and New York insurance departments usually
conduct an examination of Integrity and National Integrity, respectively, every
three years, and may do so at such other times as are deemed advisable by the
Ohio Insurance Director and New York Insurance Superintendent. The report with
respect to the most recent triennial examination of Integrity issued in 1997
covered the periods 1993 through 1995 and contained no material adverse
findings. The report with respect to the most recent triennial examination of
National Integrity issued in 1997 covered the periods 1993 through 1995 and also
contained no material adverse findings. The
25
<PAGE>
Company expects that triennial examinations of Integrity and National Integrity
for the periods 1996 through 1998 will be performed during 1999 and 2000. There
is no assurance that the examination reports will contain no material adverse
findings.
INSURANCE REGULATORY INFORMATION SYSTEM. The NAIC has developed a set of
financial relationships or "tests" called the Insurance Regulatory Information
System ("IRIS") that were designed for early identification of companies that
may require special attention by insurance regulatory authorities. These tests
were developed primarily to assist state insurance departments in executing
their statutory mandate to oversee the financial condition of insurance
companies. Insurance companies submit data on an annual basis to the NAIC, which
in turn analyzes the data using ratios covering twelve categories of financial
data with defined "usual ranges" for each category.
Falling outside the usual range of IRIS ratios is not considered a failing
result; rather, unusual values are viewed as a part of the regulatory early
warning monitoring system. Furthermore, in some years, it may not be unusual for
financially sound companies to have several ratios with results outside the
usual ranges. An insurance company may fall outside of the usual range for one
or more ratios because of specific transactions that are in themselves
immaterial or eliminated at the consolidated level. Generally, an insurance
company will become subject to increased regulatory scrutiny if it falls outside
the usual ranges of four or more of the ratios. In normal years, 15% of the
companies included in the IRIS system are expected by the NAIC to be outside the
usual range on four or more ratios.
In 1997, two IRIS ratios for Integrity and three IRIS ratios for National
Integrity fell outside the usual range due to normal business operations which
included the sale of a substantial volume of funding agreements and GICs. The
Company has not yet received 1998 IRIS results from the NAIC for Integrity and
National Integrity, but expects that less than four ratios will fall outside the
usual range for each company.
OTHER REGULATION
The Company's non-insurance activities are also subject to extensive
regulation. Integrity Capital Advisors, Inc. is registered with the Securities
and Exchange Commission (the "SEC") as an investment adviser under the
Investment Advisers Act of 1940 (the "Advisers Act") and is subject to
regulation and examination under the Advisers Act by the SEC. In addition,
variable annuities and the related nonguaranteed separate accounts of the
Company's insurance subsidiaries are subject to regulation by the SEC under the
Securities Act of 1933, as amended, and the Investment Company Act.
The Company's broker-dealer subsidiary, ARM Securities, is registered with
the SEC under the Securities Exchange Act of 1934 and is subject to regulation
by the SEC. ARM Securities is also subject to regulation, supervision and
examination by the states in which it transacts business, as well as by the
National Association of Securities Dealers, Inc. ("NASD"). The NASD has broad
administrative and supervisory powers relative to all aspects of ARM Securities'
business and may examine its business and accounts at any time.
26
<PAGE>
SBM Certificate Company is subject to regulation and supervision by federal
and state regulators. The Investment Company Act and rules issued by the SEC
thereunder specify certain terms applicable to face-amount certificates, the
method for calculating reserve liabilities on outstanding certificates, the
minimum amounts and types of investments to be deposited with a qualified
custodian to support such reserve liabilities, and a variety of other
restrictions on the operation and governance of a face-amount certificate
company. Pursuant to statutory authority, the Minnesota Department of Commerce
(the "MDC") exercises supervisory powers over SBM Certificate Company's
face-amount certificate business similar to those exercised by the SEC under the
Investment Company Act. In addition, the MDC conducts annual examinations of SBM
Certificate Company. The offer and sale of its face-amount certificates also are
subject to federal and state securities laws.
The securities laws and regulations referred to above generally grant
supervisory agencies and bodies broad administrative powers, including the power
to fine, limit or restrict a firm from conducting its business in the event that
it fails to comply with such laws and regulations. In addition to maintaining
registrations, the regulatory requirements include reporting, maintaining books
and records in prescribed forms, maintaining certain mandatory custodial
arrangements, approving employees, representatives and, in some cases, owners,
and other compliance procedures. Possible sanctions that may be imposed in the
event of noncompliance include, without limitation, the suspension of individual
employees, limitations on the firm's engaging in business for specified periods
of time, revocation of the firm's registration as an investment adviser or
broker-dealer, censures and fines. The regulators make periodic examinations and
review annual, monthly and other reports on the operations of the Company or its
subsidiaries. Changes in these laws or regulations could have a material adverse
impact on the profitability and mode of operations of the Company.
EXAMINATIONS. During 1997, the SEC conducted an examination of National
Integrity's nonguaranteed separate account products, which are registered. No
material control deficiencies were found during this examination. During 1998,
the SEC conducted an examination of SBM Certificate Company to ensure that its
activities are conducted in accordance with the federal securities laws. The
examination did not reveal any significant violations or deficiencies. In
addition, the SEC conducts routine examinations of the Company's registered
investment adviser operations to ensure compliance with the requirements
prescribed by the Advisers Act. Similarly, the NASD regulates the activities of
the Company's broker-dealer operations and conducts routine examinations
thereof.
FEDERAL INCOME TAX
In recent years, various proposals have been made that could have resulted
in a substantial effect on the Company's business, including provisions directly
related to the taxation of annuities. Currently, the Clinton Administration, in
its Revenue Proposal as released in February 1999, has introduced provisions
relative to life insurance companies that could substantially increase the
Company's current federal income tax liability. In addition, members of the
U.S. Congress have introduced several bills that provide for substantial change
in the pension and asset accumulation market places. It is not possible at this
time to predict the impact on annuities or the Company should any of these or
any similar proposals be enacted. The Company is monitoring the legislative
situation very closely and is prepared to react quickly to any legislative
changes that are ultimately
27
<PAGE>
made. However the adoption of any such proposals could have a material adverse
effect on the Company's business.
EMPLOYEES
At December 31, 1998, the Company and its subsidiaries had approximately
300 employees, none of whom were represented by a labor union. The Company
believes that its relations with its employees are good.
ITEM 2. PROPERTIES
The Company leases approximately 62,000 square feet of office space in
Louisville, Kentucky under a lease agreement (the "Lease") which expires on
September 1, 2006, and which is subject to two five-year renewal options. This
office space accommodates the executive, marketing, product development,
actuarial, accounting, corporate finance, and legal functions of the Company.
The Company has a standby letter of credit in the amount of approximately $1.7
million with one of its lending institutions to secure the Company's obligations
under the Lease.
In addition to its headquarters, the Company and its subsidiaries lease
approximately 4,300 square feet of space in the Columbus, Ohio vicinity, 15,000
square feet of space on Chamberlain Lane in Louisville, Kentucky and
approximately 4,200 square feet of office space in Goshen, New York. The
operations of the Company's New York insurance subsidiary, National Integrity,
are conducted from the Goshen, New York facility. Additional office space leased
in New Ulm, Minnesota supports the distribution operations of SBM Certificate
Company. The Chamberlain Lane space in Louisville, Kentucky serves as the
Company's primary distribution center for all of its operations. The Columbus
office space is being leased until June 30, 1999 to facilitate the termination
of the Columbus operation, and was entered into as part of the discounted buy
out and termination of Integrity's sublease for 72,000 square feet in the same
building.
ITEM 3. LEGAL PROCEEDINGS
The Company is currently involved in no material legal or administrative
proceedings. The Company's subsidiaries are currently involved only in routine
legal and administrative proceedings incidental to the conduct of their
businesses. The Company believes that none of these proceedings will have a
material adverse impact on the financial position or results of operations of
the Company or its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1998.
28
<PAGE>
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company, their ages, and positions with
the Company as of March 15, 1999, are set forth below:
NAME AGE TITLE
- --------------------------------------------------------------------------------
Martin H. Ruby 48 Chairman of the Board and Chief Executive Officer
Dennis L. Carr 49 Executive Vice President and Chief Actuary
David E. Ferguson 51 President -- ARM Technology Group
John R. Lindholm 50 President -- Retail Business Division and Director
John R. McGeeney 42 Executive Vice President and General Counsel
William H. Panning 54 Executive Vice President and Chief Investment
Officer
Edward L. Zeman 44 Executive Vice President and Chief Financial
Officer
Peter S. Resnik 38 Treasurer and Corporate Communications Officer
Barry G. Ward 37 Controller
MARTIN H. RUBY 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 July 1993. From
March 1992 until November 1993, Mr. Ruby served as Co-Chief Executive Officer of
Analytical Risk Management, Ltd. ("ARM 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 Corporation. Mr. Ruby
also held various other positions with Capital Holding Corporation from 1980
until 1986.
DENNIS L. CARR has served as Executive Vice President and Chief Actuary of
the Company since June 1996. He had been Executive Vice President and Chief
Product Development Officer of the Company since September 1993 and was
appointed Actuary in June 1995. Prior to joining the Company in September 1993,
he was Director of Product Development for the Accumulation and Investment Group
of Capital Holding Corporation. From July 1983 to July 1988, Mr. Carr was a
consulting actuary for Tillinghast, being named a principal of that firm in
1987.
DAVID E. FERGUSON has served as President -- ARM Technology Group of the
Company since May 1998. He had served as Executive Vice President and Chief
Technology Officer of the Company since January 1997. Prior to then, he was
Executive Vice President and Chief Administrative Officer of the Company since
July 1993. He also served as Chief Technology Officer of Oldarm L.P. from
January 1993 until November 1993, and was Chief Technology Officer of Franco
Associates, Ltd. from its inception in March 1992 to its merger with ARM Ltd. in
December 1992. From 1990 to March 1992, Mr. Ferguson was employed as President
and Chief Executive Officer of the James Graham Brown Foundation, Inc., a
private philanthropic association in
29
<PAGE>
Louisville, Kentucky. From 1984 to 1990, Mr. Ferguson was a partner at Ernst &
Young LLP (or its predecessor Arthur Young) and National Director of their
Insurance Industry Consulting groups.
JOHN R. LINDHOLM has served as President -- Retail Business Division of
the Company since January 1997. He had been Executive Vice President and
Chief Marketing Officer of the Company since July 1993. Until November 1993,
he served as the Chief Marketing Officer of ARM 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 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 was named Director of the Company in April
1998; he is also Chairman of the Board of The Legends Fund, Inc.
JOHN R. MCGEENEY has served as Executive Vice President and General
Counsel of the Company since September 1998. He formerly served as Executive
Vice President -- Retail Business Division since January 1997. Prior to then,
he was Co-General Counsel of the Company since January 1994, was Assistant
General Counsel of the Company from October 1993 to December 1993, and was
Secretary from December 1993 to December 1995. From February 1988 to October
1993, Mr. McGeeney served as Assistant General Counsel for the Accumulation
and Investment Group of Capital Holding Corporation. He served as an
associate with the law firm of Middleton & Reutlinger from 1986 until 1988.
WILLIAM H. PANNING has served as Executive Vice President and Chief
Investment Officer of the Company since August 1998. Prior to joining the
Company, he served as President and Chief Operating Officer for Advanced Risk
Management Services, a division of Willis Corroon, since March 1997. From
January 1995 until August 1996, he served as Senior Vice President of MetLife
Investment Management Corp. From November 1992 to December 1994, he was Vice
President of Risk Management for ITT Hartford Insurance Group. He served as
Assistant Vice President of Investment Strategy and Policy for Aetna Life and
Casualty from November 1986 to October 1992.
EDWARD L. ZEMAN has been Executive Vice President and Chief Financial
Officer of the Company since September 1995. Prior to joining the Company, Mr.
Zeman served in various positions with SBM Company from June 1990 to June 1995,
the last of which was Vice President, Chief Operating Officer, Chief Financial
Officer and Treasurer. He also served in various positions with Deloitte &
Touche LLP, a certified public accounting firm, from 1977 through 1990, the last
of which was Senior Manager. Mr. Zeman currently serves on the Board of
Directors of Dotronix, Inc.
PETER S. RESNIK has been Treasurer and Corporate Communications Officer of
the Company since May 1998. Formerly, he served as Treasurer since December
1993. From December 1992 to November 1993, he served in various financial and
operational positions for ARM Ltd. From June 1986 through July 1992, he served
as Assistant Vice President of Commonwealth Life Insurance Company, a subsidiary
of Capital Holding Corporation, in various management positions, the last of
which was Director of Planning and Budgets in the Agency Group Division.
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<PAGE>
BARRY G. WARD has served as Controller of the Company since April 1996.
From October 1993 to April 1996, Mr. Ward served as financial officer directly
responsible for the Company's financial reporting function. From January 1989 to
October 1993, he served in various positions within Ernst & Young LLP's
Insurance Practice, the last of which was Audit Manager.
31
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On June 19, 1997, the Company's Class A common stock began trading on the
American Stock Exchange under the symbol "ARM." Prior to such date, no
established public trading of the Company's common equity existed. On April 27,
1998, the Company's Class A common stock began trading on the New York Stock
Exchange under the symbol "ARM."
The following table sets forth for the periods indicated, the high and low
sale prices of the Company's Class A common stock as reported on the applicable
exchange, as well as the cash dividends per share of Class A common stock:
<TABLE>
<CAPTION>
1998 1997
------------------------------ ------------------------------
Cash Cash
Dividend Dividend
High Low Per Share High Low Per Share
------------------------------ ------------------------------
<S> <C> <C> <C> <C> <C> <C>
1st Quarter $ 26 $ 21 1/8 $ 0.02 n/a n/a n/a
2nd Quarter 24 20 0.04 $ 20 $ 18 1/2 $ --
3rd Quarter 25 7/16 12 3/4 0.04 23 13/16 19 7/16 0.02
4th Quarter 22 3/16 13 15/16 0.04 26 3/8 20 0.02
</TABLE>
As of February 25, 1999, there were approximately 2,826 holders of record
of the outstanding shares of Class A common stock.
The Company is dependent on dividends from Integrity and management and
service fee income from the Company's subsidiaries to meet ongoing cash needs,
including amounts required to pay dividends on the preferred stock and common
stock. The ability of the Company's insurance subsidiaries to pay dividends and
enter into agreements with affiliates is limited by state insurance laws. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Financial Resources -- Holding Company Operations."
On February 12, 1999, the Company declared a dividend of $0.04 per share of
Class A common stock and $2.7875 per share of Series A Preferred Stock. Both
dividends are scheduled to be paid on March 15, 1999, to shareholders of record
on February 26, 1999.
The Company's long-term debt agreement places certain restrictions on the
amount of common stock dividends it can pay to shareholders. The restrictions
limit common stock dividends in any fiscal year to the greater of one-third of
the Company's net income (before certain non-recurring charges) for the
preceding fiscal year and $3.0 million.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected historical financial information of
the Company and its subsidiaries for the years ended December 31, 1998, 1997,
1996, 1995, and 1994. The financial
32
<PAGE>
information has been derived from consolidated financial statements of the
Company, prepared in conformity with GAAP, that have been audited by Ernst &
Young LLP.
Effective May 31, 1995, the Company acquired substantially all of the
assets and business operations of SBM. This acquisition was accounted for as a
purchase, and the results of operations of the acquired businesses are included
in the Company's historical financial information from the date of acquisition.
Because 1998, 1997 and 1996 include full years of acquired SBM business
operations compared to seven months in 1995, the results of operations presented
are not completely comparable.
The selected historical financial information set forth below should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," the Company's consolidated financial
statements and the notes thereto and other financial and operating information
included herein.
33
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------
(IN THOUSANDS, EXCEPT IN SHARE AMOUNTS) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Investment income $ 480,423 $ 329,979 $ 250,031 $ 196,024 $ 149,142
Interest credited on customer deposits (380,738) (247,418) (182,161) (146,867) (116,463)
-----------------------------------------------------------------
Net investment spread 99,685 82,561 67,870 49,157 32,679
Fee income:
Variable annuity fees 20,085 14,630 10,786 7,238 4,291
Asset management fees - 8,595 5,780 3,161 -
Other fee income 1,496 1,386 1,267 949 4,100
-----------------------------------------------------------------
Total fee income 21,581 24,611 17,833 11,348 8,391
Other income and expenses:
Surrender charges 5,698 4,482 5,024 3,339 2,356
Operating expenses (35,122) (32,528) (31,055) (22,957) (21,484)
Commissions, net of deferrals (1,658) (2,218) (2,372) (1,557) (2,551)
Interest expense on debt (2,587) (2,517) (3,146) (3,461) (3,136)
Amortization:
Deferred policy acquisition costs (12,593) (10,416) (6,835) (2,932) (1,296)
Value of insurance in force (5,965) (9,293) (7,320) (7,104) (3,830)
Acquisition-related deferred charges (405) (503) (1,503) (9,920) (2,163)
Goodwill (375) (424) (488) (358) -
Non-recurring charges(1):
Stock-based compensation (2,036) (8,145) - - -
Other (2,639) (6,678) (5,004) - -
Other, net (2,830) (386) (5,366) (687) 4,972
-----------------------------------------------------------------
Total other income and expenses (60,512) (68,626) (58,065) (45,637) (27,132)
Realized investment gains (losses) (1,874) 3,192 907 4,048 (36,727)
-----------------------------------------------------------------
Income (loss) before income taxes 58,880 41,738 28,545 18,916 (22,789)
Income tax benefit (expense) (15,066) (14,139) (5,167) (7,026) 6,018
-----------------------------------------------------------------
Net income (loss) 43,814 27,599 23,378 11,890 (16,771)
Dividends on preferred stock (6,422) (4,750) (4,750) (4,750) (4,750)
-----------------------------------------------------------------
Net income (loss) applicable to common
Shareholders $ 37,392 $ 22,849 $ 18,628 $ 7,140 $ (21,521)
-----------------------------------------------------------------
-----------------------------------------------------------------
Net income (loss) per common and common
Equivalent share (diluted) $ 1.53 $ 1.07 $ 1.06 $ 0.49 $ (2.03)
-----------------------------------------------------------------
-----------------------------------------------------------------
Average common and common equivalent
Shares outstanding 24,362 21,305 17,498 14,614 10,590
-----------------------------------------------------------------
-----------------------------------------------------------------
Cash dividends paid per common share $ 0.14 $ 0.04 $ - $ - $ -
-----------------------------------------------------------------
-----------------------------------------------------------------
OTHER OPERATING DATA:
Operating earnings (2) $ 43,285 $ 34,149 $ 22,227 $ 4,509 $ 2,352
-----------------------------------------------------------------
-----------------------------------------------------------------
Operating earnings per common and
Common equivalent share (diluted) $ 1.78 $ 1.60 $ 1.27 $ 0.31 $ 0.22
-----------------------------------------------------------------
-----------------------------------------------------------------
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------
(IN THOUSANDS) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET AND OTHER DATA:
Total cash and investments $6,513,108 $4,467,477 $3,347,477 $2,798,027 $1,782,501
Assets held in separate accounts 2,896,203 2,439,884 1,135,048 809,927 506,270
Total assets 9,786,264 7,138,424 4,701,664 3,793,580 2,447,888
Long-term debt 38,000 38,000 40,000 40,000 40,000
Total liabilities 9,575,831 6,830,879 4,519,722 3,605,589 2,462,021
Shareholders' equity:
Carrying amount 210,433 307,545 181,942 187,991 (14,133)
Excluding the effects of
SFAS No. 115(3) 348,758 287,245 178,273 159,461 90,816
Fair value(4) 279,713 321,087 224,276 187,721 115,192
</TABLE>
(1) The Company recorded non-recurring charges of $4.7 million in 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 the registration expenses associated with the
Company's secondary offering of common stock. The Company recorded
non-recurring charges of $14.8 million for 1997 which included a non-cash
stock-based compensation expense charge of $8.1 million and other
non-recurring costs primarily related to the relocation and consolidation
of the Company's operations facilities from Ohio to Louisville, Kentucky.
The Company recorded non-recurring charges of $5.0 million in 1996 related
to the move of the Ohio operations and mergers and acquisition activities
that did not result in a transaction.
(2) "Operating earnings" is defined as net income applicable to common
shareholders excluding, net of tax, realized investment gains and losses,
non-recurring charges and for 1997 and 1996, income from defined benefit
pension plan asset management operations which were sold in November 1997.
(3) Excludes from carrying amount shareholders' equity the net unrealized gains
and losses on securities classified as available-for-sale, net of related
amortization and taxes.
(4) The methodologies used to estimate fair value are described in the notes to
the consolidated financial statements contained herein.
35
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company specializes in the growing asset accumulation business with
particular emphasis on retirement savings and investment products. The Company's
products and services are sold in two principal markets, the retail and
institutional markets, through a broad spectrum of distribution channels. The
Company derives its earnings from the investment spread and fee income generated
by the assets it manages. The Company groups its operations into three
operating segments (retail spread products and options, institutional spread
products and retail variable fund options) and a corporate segment, based on the
market through which the products or services are sold and 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) and institutional spread
products segment (funding agreements, GICs and certificates). The Company
receives a fee in exchange for managing customers' deposits, and the customer
accepts 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. The Company believes that market forces and population
demographics are producing and will continue to generate strong consumer demand
for long-term savings and retirement products, including retail fixed, indexed
and variable annuity products. In addition, the Company expects to benefit from
the growing institutional marketplace by developing new products and
applications for existing and new markets.
The following discussion compares the results of operations for the Company
for the three years ended December 31, 1998. For certain financial information
regarding the Company's business segments, see Note 12 of the consolidated
financial statements included herein.
RESULTS OF OPERATIONS
1998 COMPARED TO 1997
Net income during 1998 was $43.8 million compared to $27.6 million for
1997. Operating earnings (net income applicable to common shareholders
excluding, net of tax, realized investment gains and losses, non-recurring
charges and for 1997, income from defined benefit pension plan asset management
operations which were sold in 1997) were $43.3 million and $34.1 million for
1998 and 1997, respectively. The increase in operating earnings is primarily
attributable to an increase in net investment spread and variable annuity fees
due to the growth of assets under management which increased from $6.9
billion at December 31, 1997 to $9.9 billion at December 31, 1998.
36
<PAGE>
Pro forma operating earnings for 1997 (operating earnings including a pro
forma adjustment to reflect investment income at an assumed rate of 7.5% on the
net proceeds of the Company's June 1997 initial public offering of Class A
common stock assuming it occurred on January 1, 1997) were $36.3 million.
Operating earnings per diluted share (pro forma for 1997) were $1.78 and $1.51
for December 31, 1998 and 1997, respectively. This pro forma information for
1997 is not necessarily indicative of what would have occurred had the initial
public offering occurred on the earlier date.
Annualized pretax operating earnings for the retail spread products and
options segment were 1.37% and 1.36% of average assets under management of
$2.77 billion and $2.76 billion during 1998 and 1997, respectively. Annualized
pretax operating earnings for the institutional spread products segment were
0.64% and 0.62% of average assets under management of $3.77 billion and $1.48
billion during 1998 and 1997, respectively. Annualized pretax operating
earnings for the retail variable fund options segment (fee business) were 0.55%
and 0.52% of average assets under management of $1.35 billion and $970.3 million
during 1998 and 1997, respectively.
Net investment spread for the years ended December 31, 1998 and 1997 was as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
(IN THOUSANDS) 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
Investment income $ 480,423 $ 329,979
Interest credited on customer deposits (380,738) (247,418)
--------------------------
Net investment spread $ 99,685 $ 82,561
--------------------------
--------------------------
</TABLE>
The increase in net investment spread is attributable to the increase in
average spread-based customer deposits, which were $6.53 billion in 1998
compared to $4.24 billion in 1997.
Investment spread rates for the Company's two spread-based operating
segments for the years ended December 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
Retail spread products and options segment:
Investment yield 7.89% 8.00%
Average credited rate (5.83)% (5.79)%
--------------------------
Investment spread rate 2.06% 2.21%
--------------------------
--------------------------
Institutional spread products segment:
Investment yield 6.67% 6.74%
Average credited rate (5.83)% (5.92)%
--------------------------
Investment spread rate 0.84% 0.82%
--------------------------
--------------------------
</TABLE>
37
<PAGE>
Investment income on cash and investments in excess of customer deposits
(i.e., consolidated surplus assets) was $10.7 million and $9.3 million for the
years ended December 31, 1998 and 1997, respectively.
The decrease in investment yields in 1998 is primarily attributable to
lower market interest rates and a flatter U.S. Treasury yield curve during 1998.
Investment yields for the institutional spread products segment are generally
lower than the retail spread products and options segment because the proceeds
from institutional spread product sales are invested in securities of shorter
duration (which generally have lower investment yields) than the Company's other
investment portfolios. Investments in securities of a relatively shorter
duration for the institutional spread products segment are necessary to match,
within a targeted range, the average duration of institutional spread product
deposits.
The average credited rate pattern is dependent upon the general trend of
market interest rates, frequency of credited rate resets and business mix. For
institutional spread products, crediting rates are reset monthly or quarterly
based on London Interbank Offered Rates ("LIBOR"), plus a premium, and
semi-annually or annually for certain fixed annuities.
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 $20.1 million in 1998 from $14.6 million in
1997. This increase is primarily attributable to asset growth from the receipt
of variable annuity deposits and from a stock market driven increase in the
value of existing variable annuity deposits invested in mutual funds.
Assets under management by business segment as of December 31, 1998 and
1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------- -------------------
Percent Percent
(DOLLARS IN MILLIONS) Amount of Total Amount of Total
- ----------------------------------------------------------- -------------------
<S> <C> <C> <C> <C>
Retail spread products and options
(primarily fixed annuity deposits) $2,797.1 28% $2,820.6 41%
Institutional spread products
(funding agreement, GIC and
certificate deposits) 5,019.0 51 2,542.3 37
Retail variable fund options
(variable annuity deposits
invested in mutual funds) 1,606.9 16 1,129.1 16
Corporate and other:
Off-balance sheet deposits under
marketing partnership
arrangements 226.9 3 232.9 3
Cash and investments in excess of
customer deposits 224.6 2 180.8 3
-------------------- -------------------
Total assets under management $9,874.5 100% $6,905.7 100%
-------------------- -------------------
-------------------- -------------------
</TABLE>
38
<PAGE>
The increase in total assets under management was primarily attributable to
sales of floating rate funding agreements and certificates to institutional
customers and retail variable fund options and the investment performance of
variable fund options due to strong stock market returns. The Company manages
the mix of its business by monitoring various economic factors and responding to
market opportunities as they present themselves. This approach, which may
produce changes in the mix of business from one reporting period to the next, is
intended by management to enhance the Company's long-term profitability. In
addition, the Company's product mix is impacted by current market conditions,
actions of rating agencies and other competitive factors.
Sales represent premiums and deposits received for products offered through
the Company's insurance and certificate subsidiaries. Sales by market and type
of product for 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
(In millions) 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Retail:
Spread products $ 154.2 $ 348.9
Variable products:
114.7 58.7
Spread options
Fund options 285.7 181.2
-------------------------
Total variable products 400.4 239.9
-------------------------
Total retail 554.6 588.8
Institutional:
Spread products 2,515.5 1,708.7
-------------------------
Total sales $ 3,070.1 $ 2,297.5
-------------------------
-------------------------
</TABLE>
Sales of retail variable products during 1998 increased $160.5 million over
1997. This increase is primarily attributable to continued growth in sales of
the PINNACLE variable annuity product, including sales of the new SELECT TEN
PLUS investment option within PINNACLE. SELECT TEN PLUS follows the "Dogs of
the Dow" investment strategy. An additional factor contributing to the increase
in retail variable product sales is continued growth in systematic transfer
option deposits. This spread option allows dollar-cost averaging over a
twelve-month period into other investment options within variable products and
has gained popularity as a result of market volatility. Sales of retail spread
products decreased to $154.2 million in 1998. The decrease is related to the
overall decrease in interest rates which make retail spread products less
attractive in the marketplace. Retail spread product sales of $348.9 million
during 1997 were a result of a brief increase in market interest rates early in
1997. The increase in institutional sales is primarily attributable to the sale
of two privately placed $500 million certificates through a newly formed
subsidiary, ARM Face-Amount Certificate Group, Inc., and its subsidiaries, 312
Certificate Company and 212 Certificate Company. The Company continues its
sales strategy of developing a broad mix of products,
39
<PAGE>
services and distribution channels to enable it to achieve targeted sales within
different interest rate environments.
Net surrenders of retail spread and variable annuity products and options
issued by the Company's insurance subsidiaries were $365.2 million for 1998
compared to $344.5 million for 1997. Surrender charge income increased to $5.7
million in 1998 from $4.5 million in 1997. The increase in surrender charge
income is attributable to a larger mix of surrenders of customer deposits
acquired in connection with the 1995 acquisition of SBM Company's insurance
subsidiary which have higher surrender charge penalties. Retail products issued
by the Company's insurance subsidiaries generally include lapse protection
provisions that provide a deterrent to surrenders when interest rates rise.
These provisions can include surrender charges and market value adjustments on
annuity withdrawals. During the period that surrender charges are assessable
(generally the first five to seven years after a policy is issued) surrenders
are relatively low. The surrender and withdrawal activity in 1997 and 1998 was
generally expected by the Company due to the level of customer deposits written
several years ago that were subject to declining or expiring surrender charges
and the Company's strategy of maintaining investment spreads. The Company
attempts to reduce retail surrender activity and improve persistency through
various programs. The Company experienced minimal withdrawals (excluding
scheduled interest payments) by institutional spread product customers during
1997 and 1998.
Actions of rating agencies with respect to the Company's insurance
subsidiaries, its significant business partners or its competitors may impact
sales and surrender levels of the Company's products. As a result, if any of
the Company's insurance subsidiaries' or significant business partners' ratings
are downgraded, or if the ratings of the Company's competitors improve and those
of the Company's insurance subsidiaries or significant business partners do not,
the ability of the Company to distribute its products and the persistency of its
existing business could be adversely affected.
Operating expenses were $35.1 million in 1998 compared to $32.5 million in
1997. The increase in operating expenses was mainly attributable to increased
spending in 1998 for systems and technology enhancements. This spending
reflects the Company's continued strategic emphasis on growing its retail
franchise by investing in and enhancing Internet applications and its technology
infrastructure.
Amortization of deferred policy acquisition costs related to operations was
$12.6 million and $10.4 million in 1998 and 1997, respectively. This increase
was primarily the result of growth in the deferred policy acquisition cost asset
due to additional sales of fixed, indexed and variable annuity products.
Variable costs of selling and issuing the Company's insurance subsidiaries'
products (primarily commissions and certain policy issuance and marketing costs)
are deferred and then amortized over the expected life of the contracts.
Amortization of value of insurance in force related to operations of $6.0
million and $9.3 million for 1998 and 1997, respectively, primarily reflects the
amortization of the value of insurance in force established as an asset by the
Company in connection with the 1995 acquisition of SBM Company's
40
<PAGE>
insurance subsidiary. The decrease in amortization related to operations is
primarily attributable to a decrease in the value of insurance in force asset
(excluding the effects of Statement of Financial Accounting Standards ("SFAS")
No. 115, "Accounting for Certain Investments in Debt and Equity Securities")
which was $31.3 million at December 31, 1998 compared to $40.7 million at
December 31, 1997.
The Company recorded non-recurring charges of $4.7 million in 1998, of
which $3.6 million was part of a retirement package for John Franco, the
Company's former Co-Chairman and Co-Chief Executive Officer, and $1.1 million
was related to registration expenses associated with the Company's secondary
offering of common stock. The Company recorded non-recurring charges of $14.8
million for 1997 which included a non-cash stock-based compensation expense
charge and other non-recurring costs primarily related to the relocation and
consolidation of the Company's operations facilities from Ohio to Louisville,
Kentucky.
Other expenses, net, increased to $2.8 million in 1998 from $0.4 million in
1997. The increase is due to decreased 1997 net other expenses as a result of
mortgage loan prepayment penalty income and the favorable resolution of a
reinsurance claim, both in 1997.
Realized investment losses, which are reported net of related amortization
of deferred policy acquisition costs and value of insurance in force, were $1.9
million during 1998 compared to $3.2 million of realized investment gains during
1997. Such realized investment gains and losses were primarily interest-rate
related and attributable to the ongoing management of the Company's fixed
maturity securities classified as available-for-sale, which can result in
period-to-period swings in realized investment gains and losses since securities
are sold during both rising and falling interest rate environments. The ongoing
management of securities is a significant component of the Company's
asset/liability management strategy. The ongoing portfolio management process
involves evaluating the various asset sectors (i.e., security types and industry
classes) and individual securities comprising the Company's investment
portfolios and, based on market yield rates, repositioning holdings from sectors
perceived to be relatively overvalued to sectors perceived to be undervalued
with the aim of improving cash flows. The Company endeavors to accomplish this
repositioning without materially changing the overall credit, asset duration,
convexity, and liquidity characteristics of its investment portfolios.
Income tax expense was $15.1 million and $14.1 million in 1998 and 1997,
respectively, reflecting effective tax rates of 25.6% and 33.9% as a percentage
of pretax income. If the 1997 non-recurring stock-based compensation expense
charge was added back to pretax income, the effective tax rate for 1997 would
have been 28.3%. A tax benefit was not recognized for the charge because a full
valuation allowance was provided on the Company's non-life net operating loss
carryforwards. The effective tax rates of 25.6% for 1998 and 28.3% for 1997 (as
adjusted) are below the federal income tax rate of 35% primarily as a result of
the recognition of benefits associated with certain deferred tax assets
established in connection with the Company's acquisition of the Integrity
Companies in 1993 for which a full valuation allowance was originally provided.
41
<PAGE>
1997 COMPARED TO 1996
Net income during 1997 was $27.6 million compared to $23.4 million for
1996. Operating earnings (net income applicable to common shareholders
excluding, net of tax, realized investment gains and losses, non-recurring
charges and income from defined benefit pension plan asset management operations
which were sold in 1997) were $34.1 million and $22.2 million for 1997 and 1996,
respectively. The increase in operating earnings was primarily attributable to
an increase in net investment spread due to both deposit growth from sales of
retail and institutional spread products and ongoing asset/liability management
and, to a lesser extent, an increase in fee income as a result of a larger base
of variable annuity deposits.
Pro forma operating earnings (operating earnings including a pro forma
adjustment to reflect investment income that the Company believes could have
been earned at an assumed rate of 7.5% on the net proceeds of the Company's June
1997 initial public offering of common stock assuming it occurred on January 1,
1996) were $36.3 million and $26.8 million for 1997 and 1996, respectively. Pro
forma operating earnings per share were $1.51 and $1.13 for the same respective
years. This pro forma information is not necessarily indicative of what would
have occurred had the offering occurred on the earlier date.
Operating earnings for the retail spread products and options segment were
1.36% and 1.30% of average assets under management of $2.76 billion and $2.66
billion during 1997 and 1996, respectively. This increase in retail spread
margins is primarily attributable to ongoing asset/liability management, which
generated higher net investment spreads. Operating earnings for the
institutional spread products segment were 0.62% and 0.57% of average assets
under management of $1.48 billion and $567.7 million during 1997 and 1996,
respectively. The increase in institutional spread margins is also primarily
attributable to ongoing asset/liability management. Operating earnings for the
retail variable fund options segment were 0.52% and 0.66% of average assets
under management of $970.3 million and $728.2 million during 1997 and 1996,
respectively. The decline in retail variable margins is primarily attributable
to lower amortization expense of deferred policy acquisition costs during 1996.
Net investment spread for the years ended December 31, 1997 and 1996 was as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
(IN THOUSANDS) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Investment income $329,979 $250,031
Interest credited on customer deposits (247,418) (182,161)
---------------------------
Net investment spread $ 82,561 $ 67,870
---------------------------
---------------------------
</TABLE>
The increase in net investment spread is attributable to the increase in
average spread-based customer deposits which were $4.24 billion in 1997 compared
to $3.23 billion in 1996.
42
<PAGE>
Investment spread rates for the Company's two spread-based operating
segments for the years ended December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
Retail spread products and options segment:
Investment yield 8.00% 7.76%
Average credited rate (5.79)% (5.58)%
------------------------
Investment spread rate 2.21% 2.18%
------------------------
------------------------
Institutional spread products segment:
Investment yield 6.74% 6.55%
Average credited rate (5.92)% (5.79)%
------------------------
Investment spread rate 0.82% 0.76%
------------------------
------------------------
</TABLE>
Investment income on consolidated surplus assets was $9.3 million and $6.6
million for the years ended December 31, 1997 and 1996, respectively.
The increase in investment yields reflects the benefits of ongoing
investment portfolio management. The average credited rate pattern is dependent
upon the general trend of market interest rates (which were somewhat higher on
average in 1997), frequency of credited rate resets and business mix.
Fee income increased to $24.6 million in 1997 from $17.8 million in 1996.
This increase is attributable to variable annuity fees, which are based on the
market value of the mutual fund assets supporting variable annuity customer
deposits in nonguaranteed separate accounts. Variable annuity fees increased to
$14.6 million in 1997 from $10.8 million in 1996 principally due to asset growth
from the receipt of variable annuity deposits and from a market-driven increase
in the value of existing variable annuity deposits invested in mutual funds.
Variable annuity deposits averaged $970.3 million in 1997, an increase from
$728.2 million in 1996. In addition, asset management fees earned by ARM Capital
Advisors, Inc. ("ARM Capital Advisors") on off-balance sheet assets, primarily
related to defined benefit pension plans (and, in 1996 only, fees from the State
Bond Mutual Funds which were sold by the Company in December 1996), increased to
$8.6 million in 1997 from $5.8 million in 1996, reflecting a significant
increase in the off-balance sheet assets managed due to sales.
On November 7, 1997, the Company transferred substantially all of the
assets and operations of ARM Capital Advisors to ARM Capital Advisors, LLC ("New
ARMCA") and sold an 80% interest in New ARMCA. ARM Capital Advisors' management
of defined benefit pension plan accounts generated asset management fees of $8.6
million and $5.8 million during 1997 and 1996, respectively.
43
<PAGE>
On December 13, 1996, the Company transferred its contracts to perform
management and advisory services for the State Bond Mutual Funds to Federated
Investors for $4.5 million. Had the sale of ARM Capital Advisors' operations and
the sale of the management contracts for the State Bond Mutual Funds occurred on
January 1, 1996, they would not have had a material effect on the Company's net
income for the years ended December 31, 1997 and 1996.
Assets under management as of December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
----------------------- ---------------------
Percent of Percent of
(DOLLARS IN MILLIONS) Amount Total Amount Total
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Retail spread products and options
(primarily fixed annuity deposits) $ 2,820.6 41% $ 2,646.2 55%
Institutional spread products (funding
agreement and GIC deposits) 2,542.3 37 891.9 18
Retail variable fund options (variable
annuity deposits invested in mutual funds) 1,129.1 16 844.3 17
Corporate and other:
Off-balance sheet deposits under
marketing partnership arrangements 232.9 3 366.2 8
Cash and investments in excess of
customer deposits 180.8 3 77.0 2
----------------------- ---------------------
Total assets under management $ 6,905.7 100% $4,825.6* 100%
----------------------- ---------------------
----------------------- ---------------------
</TABLE>
* Does not include off-balance sheet assets managed by ARM Capital
Advisors for institutional clients. Including such assets, total assets
under management at December 31, 1996 were $7,553.0 million.
The increase in total assets under management was primarily attributable to
sales of floating rate funding agreements and GICs to institutional customers
and, to a lesser extent, an increase in retail variable product deposits
attributable to variable annuity sales and the investment performance of
variable annuity mutual funds due to strong stock market returns.
44
<PAGE>
Sales by market and type of product for 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
(In millions) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Retail:
Spread products $ 348.9 $ 110.8
Variable products:
Spread options 58.7 25.1
Fund options 181.2 194.8
--------------------------
Total variable products 239.9 219.9
--------------------------
Total retail 588.8 330.7
Institutional:
Spread products 1,708.7 747.5
--------------------------
Total sales $ 2,297.5 $ 1,078.2
--------------------------
--------------------------
</TABLE>
Total sales during 1997 rose to $2.3 billion, an increase of approximately
113% over 1996. The growth is primarily attributable to continued
diversification and expansion in the retail and institutional markets. The
growth in retail spread product sales is largely due to an increase in marketing
efforts for the Company's guaranteed rate option annuity products. Institutional
spread product sales increased as a result of (i) the addition of sales staff
and further penetration into institutional channels and (ii) the launching of a
new funding agreement product. In November 1997, the Company received a deposit
of $500 million for the new product, which was sold in partnership with BLB and
initially matures in five years and is renewable annually thereafter.
Net surrenders of retail spread and variable annuity products and options
issued by the Company's insurance subsidiaries were $344.5 million for 1997
compared to $326.2 million for 1996. Surrender charge income decreased to $4.5
million in 1997 from $5.0 million in 1996. The decrease in surrender charge
income is attributable to a larger portion of the surrenders being partial
surrenders which do not result in a surrender charge penalty. The surrender and
withdrawal activity in 1996 and 1997 was generally expected by the Company due
to the level of customer deposits written several years ago that were subject to
declining or expiring surrender charges, and the Company's strategy of
maintaining investment spreads.
Operating expenses increased to $32.5 million in 1997 from $31.1 million in
1996. The increase was primarily attributable to increased marketing efforts
(including an increase in marketing staff and additional investments in
technology) to expand and enhance the support of distribution channels in the
retail and institutional markets, partially offset by a reduction in guaranty
fund assessment accruals.
45
<PAGE>
Amortization of deferred policy acquisition costs related to operations was
$10.4 million and $6.8 million in 1997 and 1996, respectively. This increase was
primarily the result of growth in the deferred policy acquisition cost asset due
to additional sales of retail fixed and variable annuity products. Amortization
specifically attributable to variable annuity products increased $1.9 million
during 1997. Variable costs of selling and issuing the Company's insurance
subsidiaries' products (primarily commissions and certain policy issuance and
marketing costs) are deferred and then amortized over the expected life of the
contract.
Amortization of value of insurance in force related to operations was $9.3
million and $7.3 million for 1997 and 1996, respectively. The increase in
amortization expense corresponds with lower than expected gross margins for that
block of annuity business.
The Company recorded non-recurring charges of $14.8 million for 1997
including a non-cash stock-based compensation charge of $8.1 million related to
the Company's initial public offering of common stock, and other non-recurring
costs primarily attributable to the relocation and consolidation of the
Company's operations facilities from Ohio to Louisville, Kentucky. The Company
recorded a non-recurring charge of $5.0 million in 1996 that also included $3.2
million for facilities consolidation and costs of $1.8 million primarily related
to merger and acquisition activity that did not result in a transaction.
Other expenses, net, decreased to $0.4 million in 1997 from $5.4 million in
1996. This decrease is attributable to higher mortality costs in 1996 related to
immediate annuity deposits. In addition, 1997 net other expenses reflect
mortgage loan prepayment penalty income of $2.1 million and the favorable
resolution of a reinsurance claim of $2.4 million.
Realized investment gains, which are reported net of related amortization
of deferred policy acquisition costs and value of insurance in force, were $3.2
million in 1997 compared to $0.9 million in 1996. Realized investment gains in
1997 include an estimated loss of $4.0 million related to the write-down to fair
value of an investment in a fixed income security. Realized investment gains in
1996 include an estimated loss of $15.2 million related to the write-down to
fair value of an investment in a fixed income security and a gain of $4.5
million, before selling expenses, related to the transfer of the State Bond
Mutual Funds management contracts. Other realized investment gains and losses
were primarily interest-rate related and attributable to the ongoing management
of the Company's fixed maturity securities classified as available-for-sale
which can result in period-to-period swings in realized investment gains and
losses since securities are sold during both rising and falling interest rate
environments.
Income tax expense was $14.1 million and $5.2 million in 1997 and 1996,
respectively, reflecting effective tax rates of 33.9% and 18.1% as a percentage
of pretax income. If the non-recurring stock-based compensation charge was added
back to pretax income, the effective tax rate for 1997 would be 28.3%. A tax
benefit was not recognized for the charge because a full valuation allowance was
provided on the Company's non-life deferred tax assets.
46
<PAGE>
ASSET PORTFOLIO REVIEW
The Company primarily invests in securities with fixed maturities with the
objective of earning reasonable returns while limiting credit and liquidity
risks. At amortized cost, fixed maturities at December 31, 1998 totaled $6.0
billion, compared with $4.0 billion at December 31, 1997, representing
approximately 90% and 91% of total cash and investments, respectively. This
increase in investments in fixed maturities is primarily attributable to the
investment of the proceeds from sales of institutional spread products.
The Company's cash and investments as of December 31, 1998 are detailed as
follows:
<TABLE>
<CAPTION>
Amortized Cost
--------------------
Percent Estimated
(DOLLARS IN MILLIONS) Amount of Total Fair Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities:
Mortgage-backed securities:
Collateralized mortgage obligations:
Non-agency $2,296.2 34.1% $2,255.1
Agency 63.1 0.9 61.2
Agency pass-throughs 404.5 6.0 402.9
Corporate securities 2,246.3 33.3 2,097.7
Asset-backed securities 597.7 8.9 577.2
U.S. Treasury securities and obligations
of U.S. government agencies 367.3 5.5 365.3
Other government securities (primarily
foreign) 61.2 0.9 52.9
---------------------------------
Total fixed maturities 6,036.3 89.6% 5,812.3
Equity securities (i.e., non-redeemable
preferred stock) 33.5 0.5 31.7
Mortgage loans on real estate 14.6 0.2 14.6
Policy loans 129.2 1.9 129.2
Cash and cash equivalents 525.3 7.8 525.3
---------------------------------
Total cash and investments $6,738.9 100.0% $6,513.1
---------------------------------
---------------------------------
</TABLE>
Agency pass-through certificates are mortgage-backed securities ("MBSs")
which represent an undivided interest in a specific pool of residential
mortgages. The payment of principal and interest is guaranteed by the U.S.
government or U.S. government agencies. Collateralized mortgage obligations
("CMOs") are pools of mortgages that are segregated into sections, or tranches,
which provide prioritized retirement of bonds rather than a pro rata share of
principal return as in the pass-through structure. The underlying mortgages of
agency CMOs are guaranteed by the U.S. government or U.S. government agencies.
Of the Company's non-agency CMO investments at December 31, 1998 (on an
amortized cost basis), 81% used mortgage loans or mortgage loan pools (primarily
residential in nature), letters of credit, agency mortgage pass-through
securities, and other
47
<PAGE>
types of credit enhancement as collateral. The remaining 19% of the non-agency
CMOs used commercial mortgage loans as collateral.
The Company manages prepayment exposure on CMO holdings by diversifying not
only within the more stable CMO tranches, but across alternative collateral
classes such as commercial mortgages and Federal Housing Administration project
loans, which are generally less volatile than agency-backed, residential
mortgages. Additionally, prepayment sensitivity is evaluated and monitored,
giving full consideration to the collateral characteristics such as weighted
average coupon rate, weighted average maturity and the prepayment history of the
specific collateral. MBSs are subject to risks associated with prepayments of
the underlying collateral pools. Prepayments cause these securities to have
actual maturities different from those projected at the time of purchase.
Securities that have an amortized cost that is greater than par (i.e., purchased
at a premium) that are backed by mortgages that prepay faster than expected will
incur a reduction in yield or a loss, versus an increase in yield or a gain if
the mortgages prepay slower than expected. Those securities that have an
amortized cost that is less than par (i.e., purchased at a discount) that are
backed by mortgages that prepay faster than expected will generate an increase
in yield or a gain, versus a decrease in yield or a loss if the mortgages prepay
slower than expected. The reduction or increase in yields may be partially
offset as funds from prepayments are reinvested at current interest rates. The
degree to which a security is susceptible to either gains or losses is
influenced by the difference between its amortized cost and par, the relative
sensitivity of the underlying mortgages backing the assets to prepayments in a
changing interest rate environment and the repayment priority of the securities
in the overall securitization structure. The Company had gross unamortized
premiums and unaccreted discounts of MBSs of $16.4 million and $27.2 million,
respectively, at December 31, 1998.
Asset-backed securities ("ABS") are securitized bonds which can be backed
by, but not limited to, collateral such as home equity loans, second mortgages,
automobile loans and credit card receivables. At December 31, 1998, home equity
loan collateral represented 36% of the Company's investments in the ABS market.
The typical structure of an ABS provides for favorable yields, high credit
rating and stable prepayments.
Total cash and investments (on an amortized cost basis) were 95% investment
grade or equivalent at both December 31, 1998 and 1997. Investment grade
securities are those classified as 1 or 2 by the NAIC or, where such
classifications are not available, having a rating on the scale used by 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 closely monitoring the credit worthiness 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 a limited exposure to the Asian and Latin American markets. Such
foreign securities represented 9% of the Company's cash and investments at
December 31, 1998 (on an amortized cost basis), with Asian and Latin American
securities representing 2.7% of total cash and investments. The Company's
investments in foreign securities were 79% investment
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<PAGE>
grade at December 31, 1998. The Company reduces the risks associated with
buying foreign securities by limiting the exposure to both issuer and country.
The Company closely monitors the creditworthiness of such issuers and the
stability of each country. The Company's investment portfolio has minimal
exposure to real estate, mortgage loans and common equity securities, which
represented less than 0.3% of cash and investments as of December 31, 1998.
The Company analyzes its investment portfolio, including below investment
grade securities, at least quarterly in order to determine if its ability to
realize 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
collect all amounts due according to the contractual terms of the security), the
cost basis of the impaired security is written down to fair value, which becomes
the security's new cost basis. The amount of the write-down is included in
earnings as a realized loss. Future events may occur, or additional or updated
information may be received, which may necessitate future write-downs of
securities in the Company's portfolio. Significant write-downs in the carrying
value of investments could materially adversely affect the Company's net income
in future periods.
At December 31, 1998, the ratings assigned by the NAIC and comparable S&P
ratings on the Company's fixed maturity portfolio were as follows:
<TABLE>
<CAPTION>
Amortized Cost
------------------
NAIC S&P Percent Estimated
Designation Comparable Rating Amount of Total Fair Value
- --------------------------------------------------------------------------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
1 AAA, AA, A $3,601.3 59.6% $3,520.1
2 BBB 2,099.4 34.8 2,004.4
3 BB 210.1 3.5 186.0
4 B 121.4 2.0 99.5
5 CCC, CC, C 4.1 0.1 2.3
6 CI, D - - -
-------------------------------
Total fixed maturities $6,036.3 100.0% $5,812.3
-------------------------------
-------------------------------
</TABLE>
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 $138.3
million (net of $20.6 million of related capitalization of deferred policy
acquisition costs and value of insurance in force and
49
<PAGE>
$74.5 million of deferred income tax benefit) at December 31, 1998, compared to
net unrealized gains of $20.3 million (net of $15.8 million of related
amortization of deferred policy acquisition costs and value of insurance in
force and $10.9 million of deferred income taxes) at December 31, 1997. The
unrealized losses on available-for-sale securities at December 31, 1998 were
attributable to volatility in the bond market during 1998. Economic
contractions in Asia, Latin America and Russia created a "flight to quality,"
mainly U.S. Treasury securities, which decreased values in the rest of the bond
market as a result of the widening of yield 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, during the fourth quarter of 1998 the liquidity in the
bond market diminished which further depressed bond prices. Even in this
environment the Company continues to meet overall investment objectives because
of its integrated asset/liability management approach.
The change in net unrealized gains and losses on available-for-sale
securities for the year ended December 31, 1998 decreased reported shareholders'
equity by $158.6 million as compared to an increase of $16.6 million for the
year ended December 31, 1997. This volatility in reported shareholders' equity
occurred as a result of SFAS No. 115, which requires that available-for-sale
securities be carried at fair value while other assets and all liabilities are
carried at historical values. At December 31, 1998 and December 31, 1997,
shareholders' equity excluding the effects of SFAS No. 115 was $348.8 million
and $287.2 million, respectively.
The Company manages assets and liabilities in a closely integrated manner,
with the aim of reducing the volatility of investment spreads during a changing
interest rate environment. As a result, adjusting shareholders' equity for
changes in the fair value to the Company's fixed maturities and equity
securities without reflecting offsetting changes in the value of the Company's
liabilities or other assets creates volatility in reported shareholders' equity
but does not fully reflect the underlying economics of the Company's business.
The Company's accompanying consolidated financial statements include fair value
balance sheets which reflect the more limited impact on the Company's financial
position from the 1998 bond market volatility when all assets and liabilities
are adjusted to estimated fair values.
Assets held in the Company's guaranteed separate accounts include $1.26
billion of cash and investments at both December 31, 1998 and 1997, of which
approximately 94% and 87% were fixed maturities, respectively. Total guaranteed
separate account cash and investments were 97% and 99% investment grade at
December 31, 1998 and 1997, respectively. 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 will provide the Company with investment management
services for a broad range of asset classes and investment strategies.
50
<PAGE>
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.
Prior to the engagement of BlackRock, the Company's investment portfolio
was managed by New ARMCA. The Company anticipates that New ARMCA will continue
to manage a portion of the Company's assets while the Company completes the
asset management transition to BlackRock.
ASSET/LIABILITY RISK MANAGEMENT
The Company views asset/liability risk management as an integrated process,
rather than as a series of segregated functions, and incorporates this process
into each aspect of its operations. The Company's overall goal is to ensure that
invested asset cash flows will be sufficient to meet customer obligations and to
maximize investment spreads on a consistent basis. Beginning with product design
and continuing through the product sale and contract maturity, professionals in
each functional area (such as marketing, actuarial, investments, legal, finance
and administration) work jointly with a common set of risk/return
characteristics toward the goal of achieving the Company's overall liquidity and
profit objectives (rather than the specific objectives of any particular
functional area).
During product development, the Company sets product features and rate
crediting strategies only after it has devised an appropriate investment
strategy. The Company employs an extensive, iterative modeling process to test
various asset combinations against proposed product features over sets of
randomly generated interest rate scenarios. The modeling evaluates whether a
particular investment strategy backing the product features under consideration
will provide adequate cash flow and generate yields that achieve specified
minimum targets consistently over a reasonable range of interest rate
environments. If necessary, the Company redesigns investment strategies or
product features until these objectives are met.
The Company utilizes several key strategies in managing its spread-based
products. This approach allows the Company to leverage its resources and
expertise. One example is an immunization strategy currently used for the
Company's GRO products, in which a portfolio of assets is constructed and
managed to provide a target dollar amount over a pre-established time horizon.
The Company engineers and packages its spread products to suit the needs of
different types of customers in both the retail and institutional marketplaces.
Once the Company has constructed an asset portfolio having the desired
performance characteristics, the Company's investment managers have the
flexibility to trade the portfolio in order to increase investment returns while
remaining within well-defined risk parameters (such as duration, convexity,
credit quality, and liquidity). In so doing, these professionals follow
prescribed measures designed to (i) limit exposure to credit risks; (ii) manage
call, prepayment or extension
51
<PAGE>
losses and (iii) enhance yield through sector rotation and security selection.
In addition, the Company aims to generate and maintain liquidity from scheduled
interest and principal payments, projected prepayments and early calls, cash on
hand, floating rate securities and lines of credit (but not from new product
sales), sufficient presently to cover approximately two times expected cash
needs (for benefits and withdrawals for general account retail spread products,
expenses and dividends) without having to sell any investments at a material
loss.
Internal control measures are in place throughout the process to help
identify any necessary adjustments in the investment portfolio as promptly as
possible. For example, Company personnel assess, independently of portfolio
managers, whether trades would alter portfolio characteristics and how
investment yields or realized gains or losses would be accounted for under
statutory accounting practices and generally accepted accounting principles. The
Company also conducts thorough periodic analyses of its assets and liabilities,
using sophisticated software, to analyze and manage the effect of changes in
economic conditions on both its assets and liabilities, and to ensure that
changes in key assumptions, interest rates, or other factors have not
significantly altered the overall risk profile of the Company's balance sheet.
Exposure to interest rate risk is estimated by performing sensitivity tests
based on duration analysis for each of the Company's product line portfolios.
Duration is an option-adjusted measure of the percentage change in the market
value of a portfolio of assets or liabilities in response to a given change in
interest rates. Sensitivity tests performed on the Company's assets and
liabilities show that, in the aggregate, the Company's potential exposure to a
relative 10% increase in the interest rates prevalent at December 31, 1998 is a
net pretax loss of approximately $17 million in the estimated fair value of its
total cash and investments not offset by a reduction in the estimated fair value
of its customer deposits. This result necessarily depends upon key assumptions
regarding the behavior of interest sensitive cash flows such as policy
surrenders, mortgage prepayments, and bond calls. Although the Company is
careful to ensure that these assumptions are consistent with the best available
data, interest-sensitive cash flows cannot be forecast with certainty, and can
deviate significantly from the assumptions made. Moreover, asset and liability
durations are continually changing as new policyholder contracts are issued and
as new investments are added to the portfolio. Consequently, the Company manages
its balance sheet on an ongoing basis, and its net exposure to changes in
interest rates can therefore vary over time.
The Company also regularly analyzes its overall exposure to changes in
equity markets and foreign exchange rates. The performance of equity markets
affects the Company's earnings from fees on variable annuity contracts that it
issues. These earnings vary directly with the market value of policyholder
assets invested in equity funds offered by the Company. However, the magnitude
of earnings changes from changes in equity markets is difficult to forecast due
to potential simultaneous changes in policyholder fund allocations and
surrenders. Because the Company invests only in dollar-denominated securities,
it is not directly exposed to changes in foreign exchange rates. However, the
Company may own securities issued by domestic or foreign entities whose
profitability or credit ratings may vary with exchange rates.
In pursuing its investment spread objectives, the Company focuses primarily
on cash flow risks
52
<PAGE>
that are quantifiable and measurable. This approach permits the Company to
measure specifically the changes in yield and cash flow on its investments at
any given time. The Company's investment approach emphasizes investing in
securities that are readily tradable and more easily modeled and hedged, if
appropriate.
The Company's array of retail and institutional spread deposits, with
crediting rates pegged to various points on the interest rate yield curve, also
supports the Company's approach to asset/liability management. The liability
structures, in combination with asset structures, generally are aimed at
providing balance in the portfolio as interest rates fluctuate. As a result, the
Company believes it is better positioned to achieve stable margins. In addition,
the Company believes that this diversity gives it flexibility to respond to
changing market conditions and to take advantage of investment opportunities.
As a component of its asset/liability risk management strategy, the Company
invests in various derivative financial instruments in order to hedge certain
market risks. These derivative financial instruments are discussed below.
The Company offers equity-indexed products, through a guaranteed separate
account of Integrity, that meet consumer demand for equity investments with
downside protection. In connection with this product the Company held 356
off-balance sheet S&P 500 futures contracts at December 31, 1998 having a
notional amount of approximately $110.2 million. Market value gains on the
futures are a hedge against the Company's obligation to provide equity-indexed
returns to customers.
During 1998, the Company purchased an interest rate cap for $5.2 million,
having a notional amount of $1.0 billion. The objective for holding the
instrument is to limit the Company's exposure to higher market interest rates in
connection with its payment of interest credited on variable rate institutional
spread deposits.
The Company also uses interest rate swaps to convert fixed-rate securities
into floating rate investments to support its variable rate institutional spread
deposits. The Company has agreed to exchange with counterparties a fixed-rate of
interest it receives on certain investment securities for floating-rate interest
amounts calculated by reference to agreed-upon notional principal amounts.
Either the Company or the counterparty makes a single net payment at each due
date resulting in a decrease or an increase, respectively, to investment income
in the statement of income. The Company had approximately $346 million of
notional principal contracts outstanding at December 31, 1998.
LIQUIDITY AND FINANCIAL RESOURCES
HOLDING COMPANY OPERATIONS
The Company's principal need for liquidity has historically consisted of
debt service obligations under its bank financing agreement, dividend payments
on its common and preferred stock, operating expenses not absorbed by management
fees charged to its subsidiaries, and corporate development expenditures. The
Company is dependent on dividends from Integrity and management
53
<PAGE>
and service fee income from the Company's subsidiaries to meet ongoing cash
needs, including amounts required to pay dividends on its common and preferred
stock.
The ability of the Company's insurance subsidiaries to pay dividends and
enter into agreements with affiliates for the payment of services or other fees
is limited by state insurance laws. During 1998, the Company received dividends
of $6.0 million from Integrity. The maximum dividend payments that may be made
by Integrity to the Company during 1999 without the prior approval of the Ohio
Insurance Director are $37.8 million. The Company had cash and investments at
the holding company level of $41.7 million at December 31, 1998. In addition,
the Company has a $75.0 million syndicated bank credit facility of which $37.0
million was available to the Company at December 31, 1998.
To support the operations of its subsidiaries, the Company may from time to
time make capital contributions to its subsidiaries. During 1998, the Company
made capital contributions of $8.9 million and $6.0 million to Integrity and 312
CC, respectively.
In June 1997, the Company completed an initial public offering of 9.2
million shares of Class A common stock of which 5.75 million shares were sold by
the Company for net proceeds of $78.8 million. The remaining 3.45 million shares
were sold by Morgan Stanley Stockholders. On June 30, 1997, the Company used a
portion of such net proceeds to make a $40 million capital contribution to its
primary insurance subsidiary, Integrity, thereby strengthening Integrity's
capital base to provide for future growth. The Company is using the remaining
net proceeds for general corporate purposes.
In May 1998, the Company completed a secondary public offering of
approximately 12.4 million shares of common stock held by the Morgan Stanley
Stockholders. The Company did not receive any of the proceeds from the public
offering. As a result of the public offering, the Morgan Stanley Stockholders
no longer own any shares of the Company's outstanding common stock and all of
the Company's outstanding Class B common stock was converted into Class A common
stock.
In July 1998, the Company completed a $75 million offering of Series A
Preferred Stock with an initial coupon rate of 5.575% through June 15, 2003.
The net proceeds from the sale of the Series A Preferred Stock were used to
redeem the Company's $50 million of 9.5% Cumulative Perpetual Preferred Stock
on December 15, 1998, and the remainder will be used for general corporate
purposes. The Series A Preferred Stock issue provides approximately $569,000 in
annual dividend savings, following the redemption of the 9.5% Cumulative
Perpetual Preferred Stock.
The Company continues to evaluate the level of capital required to support
its business lines. The Company must maintain capital levels that satisfy the
requirements of rating agencies, regulators and others for safety and deposit
protection of customers and risk-adjusted returns for shareholders. If
additional capital becomes necessary the Company will consider various capital
and financing strategies including, but not limited to reinsurance and debt or
equity offerings. There can be no assurance that the Company would be
successful in these efforts.
54
<PAGE>
INSURANCE SUBSIDIARIES OPERATIONS
The primary sources of liquidity of the Company's insurance subsidiaries
are investment income and proceeds from maturities and redemptions of
investments. The principal uses of such funds are benefits, withdrawals and
loans associated with customer deposits, commissions, operating expenses, and
the purchase of new investments.
The Company develops cash flow projections under a variety of interest rate
scenarios generated by the Company. The Company attempts to structure asset
portfolios so that the interest and principal payments, along with other fee
income, are more than sufficient to cover the cash outflows for benefits,
withdrawals and expenses under the expected scenarios developed by the Company.
In addition, the Company maintains other liquid assets and aims to meet
unexpected cash requirements without exposure to material realized losses
during a higher interest rate environment. These other liquid assets include
cash and cash equivalents and high-grade floating-rate securities held by both
the Company and its insurance subsidiaries.
During 1998, Integrity entered into total yield swap transactions with 312
CC and 312 CC. The swap transactions generally provide that Integrity guarantees
certain levels of book yield and asset fair values in 312 CC and 212 CC, and if
these levels are not maintained, Integrity would be required to make payments
under the swaps to 312 CC or 212 CC.
In addition, substantially all of the institutional customer deposits are
subject to various investment and other guidelines, including investment fair
value levels, which if not met could require accelerated withdrawal of the
deposits. If this were to occur, the Company might need to sell securities to
fund the withdrawals and depending on interest rates and bond values a realized
loss could be incurred. In addition, the withdrawals would result in a decrease
in assets under management and would have an adverse effect on future earnings.
During the years ended December 31, 1998, 1997 and 1996, the Company met
its liquidity needs entirely by cash flows from operating activities and
principal payments and redemptions of investments. At December 31, 1998, cash
and cash equivalents totaled $525.3 million compared to $228.2 million at
December 31, 1997. The Company's aim is to manage its cash and cash equivalents
position in order to satisfy short-term liquidity needs. In connection with this
management of cash and cash equivalents, the Company may invest idle cash in
short-duration fixed maturities to capture additional yield when short-term
liquidity requirements permit.
The Company generated cash flows of $315.3 million, $216.1 million and
$192.9 million from operating activities during the years ended December 31,
1998, 1997 and 1996, respectively. These cash flows resulted principally from
investment income, less commissions and operating expenses. Proceeds from sales,
maturities and redemptions of investments generated $5.9 billion, $3.9 billion
and $2.2 billion in cash flows during 1998, 1997 and 1996, respectively, which
were offset by purchases of investments of $7.9 billion, $4.8 billion and $2.8
billion, respectively. An increase in investment purchases and sales activity
during 1998 compared to 1997 reflects the Company's ongoing management of its
fixed maturity portfolio which has increased in size due to sales of retail and
institutional spread products.
55
<PAGE>
INCOME TAXES
At December 31, 1998, the Company reported an asset for deferred income
taxes of $115.2 million on the carrying amount balance sheet. Such amount is net
of a valuation allowance of $28.0 million and deferred tax liabilities.
Management believes that the net tax benefit recorded will be fully realizable.
EFFECTS OF INFLATION AND INTEREST RATE CHANGES
The Company believes that inflation will not have a material adverse effect
on results of operations. The Company's retail and institutional spread
businesses are subject to several inherent risks arising from movements in
interest rates, especially if the Company fails to anticipate or respond to such
movements. 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 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,
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<PAGE>
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.
The Company follows asset/liability strategies that are designed to
mitigate the effect of interest rate changes on the Company's profitability.
However, there can be no assurance that management will be successful in
implementing such strategies and achieving adequate investment spreads.
Significant amounts of the Company's customer deposits are held by a relatively
small number of institutions. Such concentrations may impair the ability of the
Company to mitigate the effect of interest rate changes.
YEAR 2000
The Company has undertaken a Year 2000 project that includes all of its
subsidiaries. The Company has completed the assessment phase of the project for
all production applications, hardware (personal computers and servers), system
software, vendors, and business partners. Although the Company is still
receiving information from a few vendors and business partners and assessing
various logistic concerns with its facilities, the Company's major production
systems are substantially Year 2000 compliant. Where Year 2000 problems were
found, the necessary upgrades and repairs have begun and are scheduled for
completion no later than May 31, 1999.
As well as assessing its facilities, the Company is also in the repair and
certification testing phase of its project. The testing phase will serve to
verify the results of repairs and assessments. Steps needed to correct any
problems uncovered during testing will begin immediately at that time. The
Company's Year 2000 project is well underway and because management believes
that it will be Year 2000 compliant by May 31, 1999, it currently has no
contingency plans for system issues in place beyond its normal disaster recovery
procedures. As a precaution, the Company is developing a contingency and
business resumption plan to address various logistic concerns with its
facilities. The contingency and business resumption plan is scheduled for
completion no later than September 30, 1999.
Although the Company anticipates no major interruption of business
activities, 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
57
<PAGE>
assurance that these results and estimates will be achieved, and the actual
results could materially differ from those anticipated.
FORWARD-LOOKING STATEMENTS
Except for historical information contained in the Annual Report on Form
10-K, certain matters discussed herein, including (without limitation) under
Part I, Item 1, "Business -- General" and "Business -- Strategy" and under Part
II, Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" are forward-looking statements that involve risks and
uncertainties, including (without limitation) the Company's belief as to its
competitive position in the industry, its strategy and ability to manage
asset/liability risk and other factors affecting its business, including Year
2000 compliance. In particular, the statements of the Company's belief as to
the growth of the long-term savings and retirement market, the stimulation of
future demand for the long-term savings and retirement products and the
statements regarding the development of future products to meet the changing
needs of the markets that the Company serves are forward-looking statements.
Factors that could cause actual results to differ materially from the
forward-looking statements related to the demand for variable, indexed and fixed
annuity products include, but are not limited to, a change in population
demographics, development of alternative investment products, a change in
economic or competitive conditions, and changes in current federal income tax
and insurance laws and regulations. In addition, there can be no assurance that
(i) the Company has correctly identified and assessed all of the factors
affecting its business; (ii) the publicly available and other information on
which the Company has based its analyses is complete or correct; (iii) the
Company's analyses are correct; or (iv) the Company's strategy, which is based
in part on these analyses, will be successful.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The quantitative and qualitative disclosures about market risk are
contained in the Asset/Liability Risk Management section of Management's
Discussion and Analysis of Financial Condition and Results of Operations on
pages 51 through 53 herein.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements begin on page F-3.
Reference is made to the Index to Financial Statements on page F-1 herein.
Additional financial statement schedules are included on pages S-3 through
S-10. Reference is made to the Index to Financial Statement Schedules on page
S-1 herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in or disagreements with accountants.
58
<PAGE>
PART III
The Proxy Statement for the 1999 Annual Meeting of Stockholders (excluding
the Compensation Committee Report on Executive Compensation and the Performance
Graph sections), which, when filed pursuant to Regulation 14A under the
Securities Exchange Act of 1934, is incorporated by reference in this Annual
Report on Form 10-K pursuant to General Instruction G(3) of Form 10-K, provides
the information required under Part III (Items 10 -- Directors and Executive
Officers of the Company, Item 11 -- Executive Compensation, Item 12 -- Security
Ownership of Certain Beneficial Owners and Management, and Item 13 -- Certain
Relationships and Related Transactions), except for the information regarding
the executive officers of the Company, which is included in Part I on pages 29
through 31.
59
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Reference is made to the indexes set forth on pages F-1 and S-1 of this
report.
REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the fourth quarter
of 1998.
60
<PAGE>
EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- --------------------------------------------------------------------------------
2.1 Asset Purchase Agreement, dated as of January 5, 1995, among Kleinwort
Benson Investment Management Holdings Ltd., Kleinwort Benson Investment
Management Americas Inc., ARM Financial Group, Inc. and ARM Capital
Advisors, Inc. (Incorporated by reference to the Form 10-K filed by the
Company on March 30, 1995.)
2.2 Amended and Restated Stock and Asset Purchase Agreement dated as of
April 7, 1995, by and between SBM Company and ARM Financial Group, Inc.
(Incorporated by reference to the Form 10-Q filed by the Company on May
15, 1995.)
3(i).1 Restated Certificate of Incorporation of ARM Financial Group, Inc.
filed with the Delaware Secretary of State on June 20, 1997.
(Incorporated by reference to the Form 10-K filed by the Company on
March 31, 1998.)
3(i).2 Certificate of Designation of the Preferred Stock of ARM Financial
Group, Inc. filed with the Delaware Secretary of State on July 16,
1998. (Filed herewith.)
3(ii).1 Second Amended and Restated By-Laws of ARM Financial Group, Inc.
(Incorporated by reference to the Form 10-Q filed by the Company on May
15, 1998.)
4.1 Second Amended and Restated Stockholders Agreement dated as of June 24,
1997, among ARM Financial Group, Inc., The Morgan Stanley Leveraged
Equity Fund II, L.P., John Franco, Martin H. Ruby, Oldarm L.P., Morgan
Stanley Capital Partners III, L.P., Morgan Stanley Capital Investors,
L.P., MSCP III 892 Investors, L.P., and New ARM, LLC. (Incorporated by
reference to Amendment No. 3 to the Form S-1 Registration Statement
filed by the Company on May 23, 1997.)
10.1 ARM Financial Group, Inc. Amended and Restated Stock Option Plan dated
as of June 14, 1995. (Incorporated by reference to the Form 10-K filed
by the Company on March 29, 1996.)
10.2 Amendment No. 2 to ARM Financial Group, Inc. Amended and Restated Stock
Option Plan. (Incorporated by reference to Amendment No. 3 to the Form
S-1 Registration Statement filed by the Company on May 23, 1997.)
10.3 ARM Financial Group, Inc. 1997 Equity Incentive Plan. (Incorporated by
reference to Amendment No. 3 to the Form S-1 Registration Statement
filed by the Company on May 23, 1997.)
10.4 Amendment No. 1 to the ARM Financial Group, Inc. 1997 Equity Incentive
Plan. (Filed herewith.)
10.5 ARM Financial Group, Inc. 1998 Non-Employee Director Stock Option Plan.
(Incorporated by reference to Annex A to the Registrant's Notice of
1998 Annual Meeting and Proxy Statement filed by the Company on April
22, 1998.)
10.6 Amendment No. 1 to the ARM Financial Group, Inc. 1998 Non-Employee
Director Stock Option Plan. (Filed herewith.)
61
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- --------------------------------------------------------------------------------
10.7 Guaranty dated as of December 13, 1995, made by ARM Financial Group,
Inc. in favor of First Bank, FSB, in connection with the sale of
certain SBM Certificate Company mortgage loans. (Incorporated by
reference to the Form 10-K filed by the Company on March 29, 1996.)
10.8 Guaranty dated as of December 13, 1995, made by ARM Financial Group,
Inc. in favor of First Bank, FSB, in connection with the sale of
certain State Bond and Mortgage Life Insurance Company mortgage loans.
(Incorporated by reference to the Form 10-K filed by the Company on
March 29, 1996.)
10.9 Credit Agreement dated June 24, 1997 (the "Credit Agreement"), among
ARM Financial Group, Inc., the financial institutions listed in
Schedule 2.01 of the Credit Agreement, and The Chase Manhattan Bank.
(Incorporated by reference to the Form 10-Q filed by the Company on
August 14, 1997.)
10.10 Assignment Agreement dated as of June 24, 1997, between ARM Financial
Group, Inc., Integrity Holdings, Inc. and The Chase Manhattan Bank.
(Incorporated by reference to the Form 10-Q filed by the Company on
August 14, 1997.)
10.11 Pledge Agreement dated as of June 24, 1997, among ARM Financial Group,
Inc., Integrity Holdings, Inc. and The Chase Manhattan Bank.
(Incorporated by reference to the Form 10-Q filed by the Company on
August 14, 1997.)
10.12 Release and Amendment Agreement dated as of December 15, 1997, to the
Credit Agreement between ARM Financial Group, Inc., the financial
institutions from time to time party thereto and The Chase Manhattan
Bank. (Incorporated by reference to the Form 10-K filed by the Company
on March 31, 1998.)
10.13 Amendment dated as of April 20, 1998 to the Credit Agreement dated as
of June 24, 1997, as amended by the Release and Amendment dated as of
December 15, 1997, among ARM Financial Group, Inc., the financial
institutions from time to time party thereto, and The Chase Manhattan
Bank. (Incorporated by reference to the Form 10-Q filed by the Company
on August 14, 1998.)
10.14 Amendment dated as of October 23, 1998 to the Credit Agreement dated as
of June 24, 1997, as amended by the Release and Amendment dated as of
December 15, 1997, and the Amendment dated as of April 20, 1998, among
ARM Financial Group, Inc., the financial institutions from time to time
party thereto and The Chase Manhattan Bank. (Filed herewith.)
10.15 Amendment dated as of October 30, 1998 to the Credit Agreement dated as
of June 24, 1997, as amended by the Release and Amendment dated as of
December 15, 1997, the Amendment dated as of April 20, 1998, and the
Amendment dated as of October 23, 1998, among ARM Financial Group,
Inc., the financial institutions from time to time party thereto and
The Chase Manhattan Bank. (Filed herewith.)
10.16 Amendment dated as of January 6, 1999 to the Credit Agreement dated as
of June 24, 1997, as amended by the Release and Amendment dated as of
December 15, 1997, the Amendment dated as of April 20, 1998, the
Amendment dated as of October 23, 1998, and the Amendment dated as of
October 30, 1998, among ARM Financial Group, Inc., the financial
institutions from time to time party thereto and The Chase Manhattan
Bank. (Filed herewith.)
62
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- --------------------------------------------------------------------------------
10.17 Administrative Services Agreement dated as of September 28, 1994,
between ARM Financial Group, Inc. and National Integrity Life Insurance
Company. (Incorporated by reference to Amendment No. 2 to the Form S-1
Registration Statement filed by the Company on May 7, 1997.)
10.18 Administrative Services Agreement dated as of January 1, 1995, between
ARM Financial Group, Inc. and Integrity Life Insurance Company.
(Incorporated by reference to the Form 10-K filed by the Company on
March 29, 1996.)
10.19 Administrative Services Agreement dated as of June 14, 1995, between
ARM Financial Group, Inc. and SBM Certificate Company. (Incorporated by
reference to the Form 10-K filed by the Company on March 29, 1996.)
10.20 Administrative Services Agreement dated as of June 14, 1995, between
ARM Financial Group, Inc. and ARM Financial Services, Inc.
(Incorporated by reference to the Form 10-K filed by the Company on
March 29, 1996.)
10.21 Administrative Services Agreement dated as of November 7, 1997, between
ARM Financial Group, Inc. and ARM Capital Advisors, LLC. (Incorporated
by reference to the Form 10-K filed by the Company on March 31, 1998.)
10.22 Administrative Services Agreement dated April 22, 1998 between ARM
Financial Group, Inc. and 312 Certificate Company. (Incorporated by
reference to the Form 10-Q filed by the Company on August 14, 1998.)
10.23 Administrative Services Agreement dated September 15, 1998 between ARM
Financial Group, Inc. and 212 Certificate Company. (Incorporated by
Reference on the Form 10-Q filed by the Company on November 13, 1998.)
10.24 Investment Advisory Agreement dated as of July 29, 1994, between ARM
Financial Group, Inc. and National Integrity Life Insurance Company.
(Incorporated by reference to Amendment No. 2 to the Form S-1
Registration Statement filed by the Company on May 7, 1997.)
10.25 Investment Services Agreement dated as of January 1, 1995, between ARM
Financial Group, Inc. and Integrity Life Insurance Company.
(Incorporated by reference to the Form 10-K filed by the Company on
March 29, 1996.)
10.26 Investment Services Agreement dated as of June 14, 1995, between ARM
Financial Group, Inc. and SBM Certificate Company. (Incorporated by
reference to the Form 10-K filed by the Company on March 29, 1996.)
10.27 Investment Services Agreement dated as of November 7, 1997, between ARM
Financial Group, Inc. and ARM Capital Advisors, LLC. (Incorporated by
reference to the Form 10-K filed by the Company on March 31, 1998.)
10.28 Investment Services Agreement dated April 22, 1998 between Integrity
Capital Advisors, Inc. and ARM Capital Advisors, LLC. (Incorporated by
reference to the Form 10-Q filed by the Company on August 14, 1998.)
10.29 Investment Management Agreement dated as of September 15, 1998 among
212 Certificate Company, Integrity Capital Advisors, Inc. and The Chase
Manhattan Bank. (Filed herewith.)
10.30 Investment Management Agreement dated as of April 24, 1998 among 312
Certificate Company, Integrity Capital Advisors, Inc. and The First
National Bank of Chicago. (Incorporated by reference to the Form 10-Q
filed by the Company August 14, 1998.)
63
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- --------------------------------------------------------------------------------
10.31 Tax Allocation Agreement dated as of March 21, 1996 by and among ARM
Financial Group, Inc. and certain of its subsidiaries for taxable
periods beginning January 1, 1995. (Incorporated by reference to the
Form 10-K filed by the Company on March 29, 1996.)
10.32 Employment Agreement dated as of March 1, 1999, between ARM Financial
Group, Inc. and Martin H. Ruby. (Filed herewith.)
10.33 Employment Agreement dated as of March 1, 1999, between ARM Financial
Group, Inc. and Dennis L. Carr. (Filed herewith.)
10.34 Employment Agreement dated as of March 1, 1999, between ARM Financial
Group, Inc. and David E. Ferguson. (Filed herewith.)
10.35 Employment Agreement dated as of March 1, 1999, between ARM Financial
Group, Inc. and John R. Lindholm. (Filed herewith.)
10.36 Employment Agreement dated as of March 1, 1999, between ARM Financial
Group, Inc. and John R. McGeeney. (Filed herewith.)
10.37 Employment Agreement dated as of March 1, 1999, between ARM Financial
Group, Inc. and William H. Panning. (Filed herewith.)
10.38 Employment Agreement dated as of March 1, 1999, between ARM Financial
Group, Inc. and Edward L. Zeman. (Filed herewith.)
10.39 Agreement dated as of February 10, 1998, between ARM Financial Group,
Inc. and John Franco. (Incorporated by reference to the Form 10-K filed
by the Company on March 31, 1998.)
10.40 Lease made as of June 14, 1996, by and between Northwestern National
Life Insurance Company and ARM Financial Group, Inc. (Incorporated by
reference to the Form 10-K filed by the Company on March 29, 1996.)
10.41 Assignment and Assumption Agreement dated as of June 28, 1996, between
Northwestern National Life Insurance Company as assigned to Reliastar
Life Insurance Company, and ARM Financial Group, Inc. (Incorporated by
reference to the Form S-1 Registration Statement filed by the Company
on October 23, 1996.)
10.42 First Amendment to Lease made as of March 1, 1997, by and between
Reliastar Life Insurance Company and ARM Financial Group, Inc.
(Incorporated by reference to Amendment No. 4 to the Form S-1
Registration Statement filed by the Company on June 10, 1997.)
10.43 Lease dated as of January 28, 1999 between Hubco, Inc. and National
Integrity Life Insurance Company. (Filed herewith.)
10.44 Consent to Assignment of Engagement Agreement, dated September 8, 1993,
between General American Life Insurance Company-Group Pension.
(Incorporated by reference to Amendment No. 2 to the Form S-1
Registration Statement filed by the Company on May 7, 1997.)
64
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- --------------------------------------------------------------------------------
10.45 Amendment No. 1 to Engagement Agreement, dated as of August 14, 1995,
between General American Life Insurance Company and ARM Financial
Group, Inc. (Incorporated by reference to Amendment No. 2 to the Form
S-1 Registration Statement filed by the Company on May 7, 1997.)
10.46 Amendment No. 2 to Engagement Agreement, dated September 1, 1995,
between General American Life Insurance Company and ARM Financial
Group, Inc. (Incorporated by reference to Amendment No. 2 to the Form
S-1 Registration Statement filed by the Company on May 7, 1997.)
10.47(*) Reinsurance Agreement between General American Life Insurance Company
and Integrity Life Insurance Company. (Incorporated by reference to
Amendment No. 3 to the Form S-1 Registration Statement filed by the
Company on May 23, 1997.)
10.48 Amendment No. 1 to Trust Agreement effective as of April 1, 1996, among
Integrity Life Insurance Company, General American Life Insurance
Company and Fleet National Bank. (Incorporated by reference to the Form
10-Q filed by the Company on August 14, 1997.)
23.1 Consent of Ernst & Young LLP. (Filed herewith.)
27 Financial Data Schedule. (Filed herewith.)
(*) Portions of the exhibit have been omitted pursuant to the SEC granting
confidential treatment under Rule 406. The omitted material has been
filed separately with the SEC.
65
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on March 9, 1999.
ARM FINANCIAL GROUP, INC.
By: /s/ MARTIN H. RUBY
--------------------------------------
Martin H. Ruby
Chairman and Chief Executive Officer
66
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities indicated on the 9th day of March, 1999.
Name Title
- --------------------------------- -----------------------------------------
/s/ MARTIN H. RUBY Chairman and Chief Executive Officer
- --------------------------------- (Principal Executive Officer)
Martin H. Ruby
/s/ JOHN R. LINDHOLM President-Retail Business Division
- --------------------------------- and Director
John R. Lindholm
/s/ EDWARD L. ZEMAN Executive Vice President and Chief
- --------------------------------- Financial Officer (Principal Financial
Edward L. Zeman Officer)
/s/ BARRY G. WARD Controller (Principal Accounting Officer)
- ---------------------------------
Barry G. Ward
/s/ DAVID F. BABBEL Director
- ---------------------------------
David F. Babbel
/s/ DUDLEY J. GODFREY, JR. Director
- ---------------------------------
Dudley J. Godfrey, Jr.
/s/ MICHAEL F. HOLLAND Director
- ---------------------------------
Michael F. Holland
/s/ MARK V. KAMINSKI Director
- ---------------------------------
Mark V. Kaminski
/s/ EDWARD D. POWERS Director
- ---------------------------------
Edward D. Powers
/s/ COLIN F. RAYMOND Director
- ---------------------------------
Colin F. Raymond
/s/ IRWIN T. VANDERHOOF Director
- ---------------------------------
Irwin T. Vanderhoof
67
<PAGE>
ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors...........................................................F-2
Consolidated Balance Sheets at December 31, 1998 and 1997................................F-3
Consolidated Statements of Income for the Years
Ended December 31, 1998, 1997 and 1996..............................................F-5
Consolidated Statements of Shareholders' Equity for the Years
Ended December 31 1998, 1997 and 1996...............................................F-6
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1998, 1997 and 1996 .............................................F-7
Notes to Consolidated Financial Statements...............................................F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
ARM Financial Group, Inc.
We have audited the accompanying consolidated carrying amount balance
sheets of ARM Financial Group, Inc. and subsidiaries as of December 31, 1998 and
1997, and the related consolidated statements of income, shareholders' equity,
and cash flows for each of the three years in the period ended December 31,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by the
Company's management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
We have also audited in accordance with generally accepted auditing
standards the consolidated supplemental fair value balance sheets of ARM
Financial Group, Inc. and subsidiaries as of December 31, 1998 and 1997. As
described in Note 4, the consolidated supplemental fair value balance sheets
have been prepared by management to present relevant financial information that
is not provided by the carrying amount balance sheets and is not intended to be
a presentation in conformity with generally accepted accounting principles. In
addition, the consolidated supplemental fair value balance sheets do not purport
to present the net realizable, liquidation or market value of ARM Financial
Group, Inc. as a whole. Furthermore, amounts ultimately realized by ARM
Financial Group, Inc. from the disposal of assets may vary significantly from
the fair values presented. In our opinion, the consolidated supplemental fair
value balance sheets referred to above present fairly, in all material respects,
the information set forth therein as described in Note 4.
In our opinion, the financial statements referred to in paragraph one above
present fairly, in all material respects, the consolidated financial position of
ARM Financial Group, Inc. and subsidiaries at December 31, 1998 and 1997, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Louisville, Kentucky
February 9, 1999
F-2
<PAGE>
ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Carrying Amount Fair Value
---------------------------- ------------------------------
December 31, December 31,
(IN THOUSANDS) 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------- ------------------------------
<S> <C> <C> <C> <C>
ASSETS
Cash and investments:
Fixed maturities, available-for-sale, at fair value
(amortized cost: 1998-$6,036,275; 1997-$4,021,495) $5,812,330 $4,068,386 $5,812,330 $4,068,386
Equity securities, at fair value (cost:
1998-$33,559; 1997-$28,177) 31,745 28,342 31,745 28,342
Mortgage loans on real estate 14,554 16,429 14,554 16,429
Policy loans 129,163 126,114 129,163 126,114
Cash and cash equivalents 525,316 228,206 525,316 228,206
---------------------------- ------------------------------
Total cash and investments 6,513,108 4,467,477 6,513,108 4,467,477
Assets held in separate accounts:
Guaranteed 1,255,198 1,266,796 1,255,198 1,266,796
Nonguaranteed 1,641,005 1,173,088 1,641,005 1,173,088
Accrued investment income 59,099 44,546 59,099 44,546
Value of insurance in force 49,651 25,975 - -
Deferred policy acquisition costs 125,589 87,170 - -
Deferred federal income taxes 115,199 31,049 99,459 51,887
Receivable for investment securities sold 3,885 - 3,885 -
Goodwill 5,348 6,523 5,348 6,523
Other assets 18,182 35,800 18,182 35,800
---------------------------- ------------------------------
Total assets $9,786,264 $7,138,424 $9,595,284 $7,046,117
---------------------------- ------------------------------
---------------------------- ------------------------------
</TABLE>
F-3
<PAGE>
ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
Carrying Amount Fair Value
--------------------------- ------------------------------
December 31, December 31,
(IN THOUSANDS) 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------- ------------------------------
<S> <C> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Customer deposits $6,600,498 $4,242,578 $6,463,082 $4,218,297
Customer deposits in separate accounts:
Guaranteed 1,240,348 1,254,801 1,193,429 1,224,551
Nonguaranteed 1,641,005 1,160,595 1,565,080 1,109,277
Long-term debt 38,000 38,000 38,000 38,000
Accounts payable and accrued expenses 20,117 18,741 20,117 18,741
Payable for investment securities purchased - 69,286 - 69,286
Payable to reinsurer 6,935 8,800 6,935 8,800
Other liabilities 28,928 38,078 28,928 38,078
---------------------------- -----------------------------
Total liabilities 9,575,831 6,830,879 9,315,571 6,725,030
Contingencies
Shareholders' equity:
Preferred stock:
Series A fixed/adjustable rate cumulative (5.575%) 75,000 -
9.5% Cumulative perpetual - 50,000
Common stock:
Class A, $.01 par value; 150,000,000 shares
authorized; 23,704,411 and 21,316,068
shares issued and outstanding, respectively 237 213
Class B, $.01 par value; no shares and 50,000,000
shares authorized, respectively; no shares and
1,947,646 shares issued and outstanding, respectively - 19
Additional paid-in capital 218,268 211,430
Retained earnings 55,253 25,583
Accumulated other comprehensive income from net
unrealized gains (losses) on available-for-sale
securities (138,325) 20,300
---------------------------- -----------------------------
Total shareholders' equity 210,433 307,545 279,713 321,087
---------------------------- -----------------------------
Total liabilities and shareholders' equity $9,786,264 $7,138,424 $9,595,284 $7,046,117
---------------------------- -----------------------------
---------------------------- -----------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment income $ 480,423 $329,979 $250,031
Interest credited on customer deposits (380,738) (247,418) (182,161)
-------------------------------------------
Net investment spread 99,685 82,561 67,870
Fee income:
Variable annuity fees 20,085 14,630 10,786
Asset management fees - 8,595 5,780
Other fee income 1,496 1,386 1,267
-------------------------------------------
Total fee income 21,581 24,611 17,833
Other income and expenses:
Surrender charges 5,698 4,482 5,024
Operating expenses (35,122) (32,528) (31,055)
Commissions, net of deferrals (1,658) (2,218) (2,372)
Interest expense on debt (2,587) (2,517) (3,146)
Amortization:
Deferred policy acquisition costs (12,593) (10,416) (6,835)
Value of insurance in force (5,965) (9,293) (7,320)
Acquisition-related deferred charges (405) (503) (1,503)
Goodwill (375) (424) (488)
Non-recurring charges:
Stock-based compensation (2,036) (8,145) -
Other (2,639) (6,678) (5,004)
Other, net (2,830) (386) (5,366)
-------------------------------------------
Total other income and expenses (60,512) (68,626) (58,065)
Realized investment gains (losses) (1,874) 3,192 907
-------------------------------------------
Income before income taxes 58,880 41,738 28,545
Income tax expense (15,066) (14,139) (5,167)
-------------------------------------------
Net income 43,814 27,599 23,378
Dividends on preferred stock (6,422) (4,750) (4,750)
-------------------------------------------
Net income applicable to common shareholders $ 37,392 $ 22,849 $ 18,628
-------------------------------------------
-------------------------------------------
Net income per common share (basic) $ 1.59 $ 1.11 $ 1.06
-------------------------------------------
-------------------------------------------
Net income per common and common equivalent share (diluted) $ 1.53 $ 1.07 $ 1.06
-------------------------------------------
-------------------------------------------
Cash dividends paid per common share $ 0.14 $ 0.04 $ -
-------------------------------------------
-------------------------------------------
SEE ACCOMPANYING NOTES.
</TABLE>
F-5
<PAGE>
ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Class B Additional
Preferred Class A Common Paid-In Retained
(IN THOUSANDS) Stock Common Stock Stock Capital Earnings
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1996 $ 50,000 $ * $ * $ 124,425 $ (14,964)
Comprehensive income:
Net income 23,378
Other comprehensive income:
Change in net unrealized gains
on available-for-sale securities, net
of amortization and tax
Comprehensive income
Dividends on preferred stock (4,750)
Issuance of 18,356 shares of Class A
common stock * 184
---------------------------------------------------------------------
Balance, December 31, 1996 50,000 * * 124,609 3,664
Comprehensive income:
Net income 27,599
Other comprehensive income:
Change in net unrealized gains
on available-for-sale
securities, net
of amortization and tax
Comprehensive income
Dividends on preferred stock (4,750)
Dividends on common stock (930)
Stock-based compensation charge 8,145
Recapitalization of Class A and
Class B common stock 156 19 (175)
Issuance of 5,750,000 shares of
Class A
common stock in initial public 57 78,755
offering
Issuance of 7,743 shares of Class A
common stock from exercise of
stock options * 96
---------------------------------------------------------------------
Balance, December 31, 1997 50,000 213 19 211,430 25,583
Comprehensive income:
Net income 43,814
Other comprehensive income:
Change in net unrealized gains (losses)
on available-for-sale securities,
net of amortization and tax
Comprehensive income (loss)
Dividends on preferred stock (6,422)
Dividends on common stock (3,288)
Stock-based compensation charge 2,036
Issuance of Series A fixed/
adjustable rate preferred stock 75,000 (1,363)
Redemption of 9.5% cumulative
perpetual preferred stock (50,000)
Conversion of Class B common stock
to Class A common stock 19 (19)
Issuance of 701,208 shares of Class A
common stock from exercise of
stock options 7 8,010
Redemption of 260,511 shares of
Class A common stock (2) (1,845) (4,434)
---------------------------------------------------------------------
Balance, December 31, 1998 $ 75,000 $ 237 $ - $ 218,268 $ 55,253
---------------------------------------------------------------------
---------------------------------------------------------------------
<CAPTION>
Accumulated
Other Total
Comprehensive Shareholders'
(IN THOUSANDS) Income Equity
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Balance, January 1, 1996 $ 28,530 $187,991
Comprehensive income:
Net income 23,378
Other comprehensive income:
Change in net unrealized gains
on available-for-sale securities, net
of amortization and tax (24,861) (24,861)
--------------
Comprehensive income (1,483)
Dividends on preferred stock (4,750)
Issuance of 18,356 shares of Class A
common stock 184
-------------------------------------
-------------------------------------
Balance, December 31, 1996 3,669 181,942
Comprehensive income:
Net income 27,599
Other comprehensive income:
Change in net unrealized gains
on available-for-sale
securities, net
of amortization and tax 16,631 16,631
--------------
Comprehensive income 44,230
Dividends on preferred stock (4,750)
Dividends on common stock (930)
Stock-based compensation charge 8,145
Recapitalization of Class A and
Class B common stock -
Issuance of 5,750,000 shares of Class A
common stock in initial public offering 78,812
Issuance of 7,743 shares of Class A
common stock from exercise of
stock options 96
-------------------------------------
Balance, December 31, 1997 20,300 307,545
Comprehensive income:
Net income 43,814
Other comprehensive income:
Change in net unrealized gains (losses)
on available-for-sale securities,
net of amortization and tax (158,625) (158,625)
--------------
Comprehensive income (loss) (114,811)
Dividends on preferred stock (6,422)
Dividends on common stock (3,288)
Stock-based compensation charge 2,036
Issuance of Series A fixed/
adjustable rate preferred stock 73,637
Redemption of 9.5% cumulative
perpetual preferred stock (50,000)
Conversion of Class B common stock
to Class A common stock -
Issuance of 701,208 shares of Class A
common stock from exercise of
stock options 8,017
Redemption of 260,511 shares of
Class A common stock (6,281)
-------------------------------------
-------------------------------------
Balance, December 31, 1998 $(138,325) $ 210,433
-------------------------------------
-------------------------------------
</TABLE>
* LESS THAN $1,000.
SEE ACCOMPANYING NOTES.
F-6
<PAGE>
ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
(IN THOUSANDS) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income $ 43,814 $ 27,599 $ 23,378
Adjustments to reconcile net income to cash flows provided by operating
activities:
Interest credited on customer deposits, excluding separate accounts 309,110 212,964 172,202
Stock-based compensation charge 2,036 8,145 -
Realized investment (gains) losses 1,874 (3,192) (907)
Amortization of value of insurance in force and deferred policy
acquisition costs 18,558 19,709 14,155
Other amortization 3,269 1,426 1,374
Deferral of policy acquisition and other costs (46,646) (40,033) (24,202)
Deferred tax expense 1,263 1,003 2,554
(Increase) decrease in accrued investment income (14,553) (8,313) 149
Changes in other assets and liabilities (3,464) (3,243) 4,171
---------------------------------------
Cash flows provided by operating activities 315,261 216,065 192,874
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Fixed maturity investments:
Purchases (7,925,791) (4,710,312) (2,716,010)
Maturities and redemptions 820,480 445,772 241,391
Sales 5,030,320 3,355,461 1,922,689
Other investments:
Purchases (17,202) (72,283) (55,995)
Maturities and redemptions 2,306 20,806 7,310
Sales 7,412 62,196 42,961
Policy loans, net (3,049) (2,648) (5,938)
Transfers (to) from insurance subsidiaries' separate accounts:
Purchase of assets held in separate accounts (470,061) (1,066,348) (302,993)
Proceeds from sale of assets held in separate accounts 200,579 110,524 83,077
---------------------------------------
Cash flows used in investing activities (2,355,006) (1,856,832) (783,508)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Amounts received from customers 3,068,129 2,268,496 1,072,323
Amounts paid to customers (746,946) (579,618) (441,944)
Net proceeds from issuance of common stock 3,610 80,308 184
Net proceeds from issuance of preferred stock 75,000 - -
Organizational, debt and stock issuance costs (1,363) (1,400) -
Redemption of preferred stock (50,000) - -
Principal payment on long-term debt - (2,000) -
Change in payable to reinsurer (1,865) (1,200) 10,000
Dividends on common stock (3,288) (930) -
Dividends on preferred stock (6,422) (4,750) (4,750)
Change in repurchase agreement liability - - (12,008)
---------------------------------------
Cash flows provided by financing activities 2,336,855 1,758,906 623,805
---------------------------------------
Increase in cash and cash equivalents 297,110 118,139 33,171
Cash and cash equivalents at beginning of year 228,206 110,067 76,896
---------------------------------------
Cash and cash equivalents at end of year $ 525,316 $ 228,206 $ 110,067
---------------------------------------
---------------------------------------
Supplemental cash flow information:
Interest paid on debt $ 2,252 $ 1,837 $ 2,613
---------------------------------------
---------------------------------------
Income taxes paid $ 11,112 $ 2,943 $ 7,230
---------------------------------------
---------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-7
<PAGE>
ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
ARM Financial Group, Inc. (the "Company") specializes in the growing
asset accumulation business with particular emphasis on retirement savings
and investment products. The Company's retail products include a variety of
fixed, indexed and variable annuities and face-amount certificates sold
through a broad spectrum of distribution channels including independent
broker-dealers, independent agents, stockbrokers, and financial institutions.
The Company offers institutional products, such as funding agreements,
certificates and guaranteed investment contracts ("GICs") directly to defined
contribution plans, bank collective trust funds, GIC investment managers,
money market funds, corporate treasurers, and other institutional investors.
The Company derives its earnings from the net investment spread and fee
income generated by the assets it manages. With retail and institutional
spread products and options offered by the Company, the Company's insurance
and face-amount certificate subsidiaries agree to return customer deposits
with interest at a specified rate or a rate based on a specified index (e.g.,
LIBOR, S&P 500 - both defined below). As a result, the Company's insurance
and face-amount certificate subsidiaries accept investment risk in exchange
for the opportunity to achieve a spread between what the Company earns on
invested assets and what it pays or credits on customer deposits. With retail
variable fund options offered by the Company, the Company's subsidiaries
receive a fee in exchange for managing deposits, and the customer accepts
investment risk associated with their chosen mutual fund options. Because the
investment risk is borne by the customer, this business requires
significantly less capital support than spread-based business.
The Company conducts its different businesses through a variety of
subsidiaries. Retail fixed, indexed and variable annuities and institutional
funding agreements and GICs are offered through the Company's insurance
subsidiaries, Integrity Life Insurance Company ("Integrity") and National
Integrity Life Insurance Company ("National Integrity") (collectively, the
"Integrity Companies"). ARM Securities Corporation ("ARM Securities"), a
registered broker-dealer, provides a distribution channel for selling
affiliated and nonaffiliated retail products. Retail face-amount certificates
are issued through SBM Certificate Company and privately placed certificates
are issued through ARM Face-Amount Certificate Group, Inc. and its
subsidiaries.
The Company received initial start-up capital as partial funding for the
acquisition of the Integrity Companies through the private issuance of common
stock in November 1993. In June 1995, the Company received additional capital
to fund the acquisition of substantially all of the assets and business
operations of SBM Company ("SBM") also through the private issuance of common
stock. Such capital was primarily provided by certain private equity funds
sponsored by Morgan Stanley Dean Witter & Co. (the "Morgan Stanley
Stockholders"). In June 1997, the Company completed an initial public
offering (the "Offering") of common stock. The Morgan Stanley Stockholders
owned approximately 91% of the outstanding shares of the Company's common
stock prior to the Offering and, as a result of the Offering, owned
approximately 53% at December 31, 1997. In May 1998, the
F-8
<PAGE>
Company completed a secondary public offering of approximately 12.4 million
shares of common stock held by the Morgan Stanley Stockholders. The Company
did not receive any of the proceeds from the public offering. As a result of
the public offering, the Morgan Stanley Stockholders no longer own any shares
of the Company's outstanding common stock and all of the Company's
outstanding Class B common stock was converted into Class A common stock.
The Company had no significant business activity until November 26,
1993, when it acquired the Integrity Companies resulting in approximately
$2.3 billion of assets under management. Assets under management have grown
to $9.9 billion as of December 31, 1998.
BASIS OF PRESENTATION
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles ("GAAP") and include the accounts of
the Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with GAAP requires
management of the Company to make estimates and assumptions that affect the
amounts reported in the consolidated financial statements and accompanying
notes. Actual results could differ from those estimates.
The consolidated balance sheets include a dual presentation of carrying
amount and fair value balances. In accordance with Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," fixed maturities classified as available-for-sale
are reported at fair value in the carrying amount balance sheets; however,
corresponding customer deposits are reported at historical values. In contrast,
in the fair value balance sheets, both assets and liabilities are reported at
fair value. As permitted by SFAS No. 107, "Disclosures About Fair Value of
Financial Instruments," the fair value balance sheets are presented as a
supplemental disclosure to provide additional information on the Company's
financial position. Note 4 describes the methods and assumptions used by the
Company in estimating fair value.
INVESTMENTS
All of the Company's fixed maturities and equity securities are classified
as available-for-sale and stated at fair value. Unrealized gains and losses on
available-for-sale securities are reported as a separate component of
shareholders' equity, net of adjustments to value of insurance in force and
deferred policy acquisition costs equal to the change in amortization that would
have been recorded if these securities had been sold as of the balance sheet
date, and net of deferred income taxes. The amortized cost of fixed maturities
is adjusted for amortization of premiums and accretion of discounts to maturity,
or in the case of mortgage-backed and asset-backed securities, over the
estimated life of the security. Such amortization and accretion is computed
using the interest method and is included in investment income. Anticipated
prepayments on mortgage-backed and asset-backed securities are considered in
determining the effective yield on such securities. If a difference arises
between anticipated and actual prepayments, the carrying value of the investment
is adjusted with a corresponding charge or credit to investment income. Interest
and dividends are included in investment income. Mortgage loans on real estate
and policy loans are carried at their unpaid principal balances. Cash and cash
equivalents consist of highly liquid investments with maturities of three months
or less at their time of purchase.
F-9
<PAGE>
Realized gains and losses on the sale of investments are determined based
upon the average cost method and include provisions for other-than-temporary
impairments where appropriate. In addition, the amortization of value of
insurance in force and deferred policy acquisition costs is adjusted for gains
and losses realized on sales of investments which support customer deposits. The
adjustment to amortization associated with such realized gains and losses is
included in Realized Investment Gains (Losses) in the consolidated statements of
income.
VALUE OF INSURANCE IN FORCE, DEFERRED POLICY ACQUISITION COSTS AND GOODWILL
A portion of the purchase price paid for the insurance subsidiaries was
allocated to the value of insurance in force based on the actuarially determined
present value of the expected pretax future profits from the business assuming a
discount rate of 13%. This present value amount was reduced to the extent that
the fair value of the net assets acquired including the value of insurance in
force exceeded the purchase price allocated to the insurance subsidiaries.
Interest is accrued on the balance annually at a rate consistent with the rate
credited on the acquired policies on the acquisition date. Recoverability of the
value of insurance in force is evaluated quarterly by comparing the current
estimate of the present value of expected pretax future profits to the
unamortized asset balance. If such current estimate is less than the existing
asset balance, the difference would be charged to expense. To the extent
recoverable from future gross profits, costs of producing new business
(primarily commissions and certain policy issuance and marketing costs) which
vary with and are primarily related to the production of new business are
deferred. Value of insurance in force and deferred policy acquisition costs are
amortized in proportion to the emergence of gross profits, including related
realized investment gains and losses, over the estimated term of the underlying
policies. In addition, an adjustment is made to value of insurance in force and
deferred policy acquisition costs equal to the change in amortization that would
have been recorded if unrealized gains and losses on available-for-sale
securities had been realized as of the balance sheet date.
A portion of the purchase price paid for subsidiaries was allocated to
goodwill representing the excess of the purchase price paid over the fair value
of net assets acquired. Goodwill currently recorded is amortized over a period
not exceeding twenty years using the straight-line method.
Incremental costs directly related to the integration of acquired companies
were deferred, to the extent recoverable from future gross profits of the
acquired companies. Such deferred transition costs are amortized using the
straight-line method over the estimated term of the policies underlying the
acquired companies.
ASSETS HELD IN SEPARATE ACCOUNTS AND CUSTOMER DEPOSITS IN SEPARATE ACCOUNTS
Assets held in separate accounts of the Company's insurance subsidiaries
are segregated from other investments and are not subject to claims that arise
out of any other business of the Company. The separate accounts include customer
deposits and related invested assets, for retail and institutional spread
products and options (guaranteed) and retail variable fund options
(nonguaranteed). Separate account assets and liabilities are generally carried
at estimated fair values. Investment income and interest credited on customer
deposits related to spread product deposits are included as such in the
statements of income. The Company receives administrative fees for managing
retail variable fund option deposits and other fees for assuming mortality and
certain expense risks. Such fees are included in Variable Annuity Fees in the
statements of income.
F-10
<PAGE>
CUSTOMER DEPOSITS
For single and flexible premium deferred annuities, single premium
endowments, face-amount certificates, funding agreements, and guaranteed
investment contracts, customer deposits represent account values before
applicable surrender charges. Such account values represent premiums and
deposits received, plus interest credited, less withdrawals and assessed fees.
For structured settlements and other single premium immediate annuities,
customer deposits represent the present value of future benefit payments and
maintenance expenses. The interest rate used in determining such present value
was approximately 7.34% as of December 31, 1998.
RECOGNITION OF FEE INCOME
Variable annuity fees and asset management fees are recorded in income as
earned. Other fee income includes marketing partnership fees earned related to
ventures with other insurance companies and certain fees earned by ARM
Securities (primarily net retained commissions). Premiums and deposits received
from customers are not included in the statements of income.
FEDERAL INCOME TAXES
Income taxes have been provided for using the liability method in
accordance with SFAS No. 109, "Accounting for Income Taxes."
NET INCOME PER SHARE OF COMMON STOCK
SFAS No. 128, "Earnings Per Share," requires companies to present basic
earnings per share, and, if applicable, diluted earnings per share, instead of
primary and fully diluted earnings per share. Basic earnings per share excludes
dilution and is computed by dividing net income applicable to common
shareholders by the weighted average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution that could
occur if options to issue common stock were exercised to purchase common stock.
COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the adoption of
this Statement had no impact on the Company's net income or total shareholders'
equity. SFAS No. 130 requires unrealized gains or losses on the Company's
available-for-sale securities to be included in other comprehensive income.
Prior year financial statements have been reclassified to conform to the
requirements of SFAS No. 130.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The Company
expects to adopt the new statement effective January 1, 2000. The statement will
require the Company to recognize all derivatives on the balance sheet at fair
value. The Company does not anticipate that the adoption of this statement will
have a significant effect on its results of operations or financial position.
F-11
<PAGE>
2. INVESTMENTS
The amortized cost and estimated fair values of available-for-sale
securities were as follows:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Estimated
(IN THOUSANDS) Cost Gains Losses Fair Value
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1998:
Fixed Maturities:
Mortgage-backed securities $2,763,786 $ 12,953 $ 57,553 $2,719,186
Corporate securities 2,246,323 24,811 173,474 2,097,660
Asset-backed securities 597,741 858 21,410 577,189
U.S. Treasury securities and obligations of
U.S. government agencies 367,260 342 2,187 365,415
Foreign governments 56,629 -- 7,914 48,715
Obligations of state and political subdivisions 4,536 11 382 4,165
--------------------------------------------------------
Total fixed maturities 6,036,275 38,975 262,920 5,812,330
Equity securities 33,559 618 2,432 31,745
--------------------------------------------------------
Total available-for-sale securities 6,069,834 $ 39,593 $ 265,352 $5,844,075
--------------------------------------------------------
--------------------------------------------------------
<CAPTION>
DECEMBER 31, 1997:
Fixed Maturities:
Mortgage-backed securities $1,828,062 $ 29,881 $ 3,456 $1,854,487
Corporate securities 1,390,274 35,875 16,134 1,410,015
Asset-backed securities 400,276 1,981 1,832 400,425
U.S. Treasury securities and obligations of
U.S. government agencies 318,583 1,464 371 319,676
Foreign governments 79,466 1,633 1,867 79,232
Obligations of state and political subdivisions 4,834 12 295 4,551
--------------------------------------------------------
Total fixed maturities 4,021,495 70,846 23,955 4,068,386
Equity securities 28,177 309 144 28,342
--------------------------------------------------------
Total available-for-sale securities $4,049,672 $ 71,155 $ 24,099 $4,096,728
--------------------------------------------------------
--------------------------------------------------------
</TABLE>
F-12
<PAGE>
The amortized cost and estimated fair value of available-for-sale
securities, by contractual maturity, are shown below:
<TABLE>
<CAPTION>
December 31, 1998
---------------------------
Estimated
(IN THOUSANDS) Cost Fair Value
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 39,168 $ 46,293
Due after one year through five years 216,818 202,498
Due after five years through ten years 458,598 432,794
Due after ten years 1,960,164 1,834,370
Asset-backed securities 597,741 577,189
Mortgage-backed securities 2,763,786 2,719,186
Equity securities 33,559 31,745
---------------------------
Total available-for-sale securities $ 6,069,834 $ 5,844,075
---------------------------
---------------------------
</TABLE>
Expected maturities will differ from contractual maturities because
borrowers may have the right to call or repay obligations with or without call
or prepayment penalties and because mortgage-backed and asset-backed securities
(including floating-rate securities) provide for periodic payments throughout
their lives.
During 1998, 1997 and 1996, gross gains of $33.5 million, $45.0 million and
$33.5 million, respectively, and gross losses of $30.0 million, $36.0 million
and $18.9 million, respectively, were realized on sales of fixed maturities. For
the years ended December 31, 1997 and 1996, the Company recorded losses of $4.0
million and $15.2 million related to write-downs to the fair value of
investments in fixed income securities. For the years ended December 31, 1998,
1997 and 1996, the recognition of net realized gains on investments supporting
customer deposits resulted in additional amortization of value of insurance in
force of $3.5 million, $3.0 million and $1.9 million, respectively, and
additional amortization of deferred policy acquisition costs of $0.7 million
$0.4 million and $0.03 million, respectively.
In accordance with SFAS No. 115, net unrealized gains and losses on
investments classified as available-for-sale were reduced by deferred federal
income taxes and adjustments to value of insurance in force and deferred policy
acquisition costs that would have been required had such gains and losses been
realized. Net unrealized gains and losses on available-for-sale securities
reflected as a separate component of shareholders' equity are summarized as
follows:
<TABLE>
<CAPTION>
December 31,
---------------------------
(IN THOUSANDS) 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net unrealized gains (losses) on available-for-sale securities
before adjustments for the following: $ (233,410) $ 47,056
Capitalization (amortization) of value of insurance in force and
deferred policy acquisition costs 20,603 (15,825)
Deferred federal income tax effect 74,482 (10,931)
---------------------------
Net unrealized gains (losses) on available-for-sale securities $ (138,325) $ 20,300
---------------------------
---------------------------
</TABLE>
F-13
<PAGE>
Investments, aggregated by issuer, in excess of 10% of shareholders' equity
(before net unrealized gains and losses on available-for-sale securities) at
December 31, 1998 and 1997, other than investments in affiliates and investments
issued or guaranteed by the United States government, are as follows. Such
securities were 99.9% and 99.8% investment grade at December 31, 1998 and 1997,
respectively.
<TABLE>
<CAPTION>
Carrying Carrying
(IN MILLIONS) Amount (IN MILLIONS) Amount
- ---------------------------------------------------------------- --------------------------------------------------------------
<S> <C> <C> <C>
1998: 1997:
Fixed maturities: Fixed maturities:
Aames Mortgage Trust $39.1 Aames Mortgage Trust $31.7
ABN Amro Mortgage Corporation 45.0 Aircraft Lease Portfolio Securities 34.6
Chancellor Triton CBO, Limited 54.1 Bear Stearns Mortgage Securities 39.7
Chase Mortgage Finance Corporation 94.5 Countrywide Mortgage Backed 39.1
CitiCorp Mortgage Securities 57.2 CRAVE Trust 52.7
Countrywide Home Loans 186.8 Delta Funding Home Equity Loan Trust 31.6
CRAVE Trust 46.3 DLJ Mortgage Acceptance Corporation 75.9
CS First Boston Securities Corporation 89.7 First Chicago/Lennar 34.5
DLJ Mortgage Acceptance Corporation 62.8 General Electric Capital Mortgage Services, Inc. 33.4
Enserch Corporation 39.1 Greenwich Capital Acceptance 50.6
Enterprise Capital Trust II 37.1 Headlands Mortgage Securities, Inc. 30.5
First Boston 113.9 J.P. Morgan & Company 35.9
FMAC Loan Receivables Trust 47.1 LB Mortgage Trust 62.9
General Electric Capital Mortgage Services, Inc. 100.1 Merit Securities Corporation 55.3
Greenwich Capital Acceptance 48.6 Norwest Asset Securities Corporation 64.5
Highland Secured Loan Trust 39.3 PNC Mortgage Securities Corporation 46.7
LB Mortgage Trust 96.6 Residential Accredit Loans 47.1
Magnetite Asset Investors Corporation 73.5 Residential Asset Securities Trust 50.4
Metris Master Trust 53.5 Residential Funding Mortgage 47.3
Norwest Asset Securities Corporation 162.4 Salomon Brothers Mortgage Securities VII 95.4
PNC Mortgage Securities Corporation 116.7 Sears Mortgage Securities 29.8
Residential Accredit Loans 46.0 Structured Asset Securities Corporation 64.6
Residential Asset Securities Trust 36.5
Residential Funding Mortgage 123.7
Salomon Brothers Mortgage Securities VII 124.8
Structured Asset Securities Corporation 187.1
</TABLE>
F-14
<PAGE>
The components of investment income were:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
(IN THOUSANDS) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities $447,402 $300,327 $228,473
Policy loans 9,567 8,925 8,629
Mortgage loans on real estate 1,348 4,038 4,321
Cash and cash equivalents 19,227 13,514 5,705
Income from other investments 2,879 3,175 2,903
----------------------------------------
Investment income $480,423 $329,979 $250,031
----------------------------------------
----------------------------------------
</TABLE>
3. DERIVATIVE INSTRUMENTS
The Company generally utilizes derivative financial instruments in order to
hedge specific market value risks and interest rate risks. These derivative
financial instruments, none of which are held for trading purposes, are
described further below.
The Company offers equity-indexed products, through a guaranteed separate
account of Integrity, that meet consumer demand for equity investments with
downside protection. In connection with this product the Company held 356
off-balance sheet futures contracts based on the S&P 500 Composite Stock Price
Index ("S&P 500") at December 31, 1998, having a notional amount of $110.2
million. Unrealized market value gains on the futures are recorded in the
statement of income to hedge against the Company's obligation to provide
equity-indexed returns to customers. As of December 31, 1998, outstanding
futures had unrealized gains of approximately $5.8 million, which were $2.0
million less than the related obligation due to hedge ineffectiveness, resulting
in a $2.0 million realized loss.
During 1998, the Company purchased an interest rate cap for $5.2 million,
having a notional amount of $1.0 billion and a LIBOR strike price of 5.75%. The
objective for holding the instrument is to limit the Company's exposure to
higher market interest rates in connection with its payment of interest credited
on variable rate institutional spread deposits. The purchase price of the cap
will be amortized into operations using the interest method over the three year
duration of the cap. Payments received from the cap will be recorded as an
offset to interest credited on customer deposits.
The Company also uses interest rate swaps to convert fixed-rate securities
into floating-rate investments to support its variable rate institutional spread
deposits. The Company has agreed to exchange with counterparties a fixed-rate of
interest it receives on certain investment securities for floating-rate interest
amounts calculated by reference to agreed-upon notional principal amounts.
Either the Company or the counterparty makes a single net payment at each due
date resulting in a decrease or an increase, respectively, to investment income
in the statement of income. The Company has approximately $346 million of
notional principal contracts outstanding at December 31, 1998. These interest
rate swaps, included in cash and investments, are marked to market and any
unrealized gain or loss is classified with accumulated other comprehensive
income. At December 31, 1998, the swaps had a net unrealized loss of $18.1
million.
F-15
<PAGE>
The Company is exposed to credit-related losses in the event of
nonperformance by counterparties to the derivative financial instruments, but
does not expect any counterparties to fail to meet their obligations given their
high credit ratings.
4. FAIR VALUE BALANCE SHEETS
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires disclosure of fair value information about all financial instruments,
including insurance liabilities classified as investment contracts, unless
specifically exempted. The accompanying fair value balance sheets reflect fair
values for those financial instruments specifically covered by SFAS No. 107,
along with fair value amounts for other assets and liabilities for which
disclosure is permitted but not required.
The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale. In cases where quoted market prices
are not available, fair values are based on estimates using present value or
other valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. Accordingly, the aggregate fair value amounts presented do not
necessarily represent the underlying value of the Company.
The Company's management of interest rate risk aims to reduce its exposure
to changing interest rates through a close matching of duration, convexity and
cash flow characteristics of both assets and liabilities while maintaining
liquidity redundancies (i.e., sources of liquidity in excess of projected
liquidity needs). As a result, fair values of the Company's assets and
liabilities will tend to respond similarly to changes in interest rates.
The following methods and assumptions were used in estimating fair values:
FIXED MATURITIES AND EQUITY SECURITIES
Fair values for fixed maturities and equity securities are based on quoted
market prices, where available. For fixed maturities for which a quoted market
price is not available, fair values are estimated using internally calculated
estimates or quoted market prices of comparable instruments.
MORTGAGE LOANS ON REAL ESTATE AND POLICY LOANS
The carrying amount of mortgage loans on real estate and policy loans
approximates their fair value.
CASH AND CASH EQUIVALENTS AND ACCRUED INVESTMENT INCOME
The carrying amount of cash and cash equivalents and accrued investment
income approximates their fair value given the short-term nature of these
assets.
ASSETS HELD IN SEPARATE ACCOUNTS AND CUSTOMER DEPOSITS IN SEPARATE ACCOUNTS
The fair value of assets held in guaranteed separate accounts is primarily
based on quoted market prices of fixed maturity securities held in such separate
accounts. The fair value of customer deposits in guaranteed separate accounts is
based on the account values of the underlying policies, plus or minus market
value adjustments. Fair values of assets and customer deposits in nonguaranteed
F-16
<PAGE>
separate accounts is based on the quoted market prices of the underlying mutual
funds. The reduction in fair values for customer deposits in separate accounts
reflect the present value of future gross margins from net investment spread,
product charges, distribution fees, and surrender charges.
GOODWILL
The carrying amount of goodwill approximates fair value.
DEFERRED POLICY ACQUISITION COSTS AND VALUE OF INSURANCE IN FORCE
Deferred policy acquisition costs and value of insurance in force do not
appear on the fair value presentation because those values are implicitly
considered in the determination of the fair value of the corresponding customer
deposits and customer deposits in separate accounts.
DEFERRED FEDERAL INCOME TAXES
The deferred federal income tax asset and related valuation allowance were
adjusted for federal income tax which may be incurred as a result of the
differences between the estimated fair values and carrying amounts of the assets
and liabilities.
CUSTOMER DEPOSITS
The fair value of customer deposits for single premium immediate annuity
contracts is based on discounted cash flow calculations using rates from a
current market yield curve for assets with similar durations. The fair value
amounts of the remaining customer deposits, primarily related to deferred
annuity contracts, single premium endowment contracts, funding agreements, GICs,
and face-amount certificates represent the estimated present value of cash flows
using current market rates and the duration of the liabilities.
LONG-TERM DEBT AND PAYABLE TO REINSURER
The carrying amounts of long-term debt and payable to reinsurer approximate
fair value.
OTHER ASSETS AND LIABILITIES
The fair values of other assets and liabilities are reported at their
financial statement carrying amounts.
F-17
<PAGE>
5. VALUE OF INSURANCE IN FORCE
The following provides information on the value of insurance in force
during 1998, 1997 and 1996:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
(IN THOUSANDS) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Amortization excluding effects of realized and unrealized investment gains
and losses $ (7,910) $(11,798) $(10,474)
Interest accrued on unamortized balance 1,945 2,505 3,154
-------------------------------------------
Net amortization as reported in the statements of income (5,965) (9,293) (7,320)
Amortization related to realized investment gains and losses(a) (3,513) (2,987) (1,890)
Change in amortization related to unrealized gains and losses on
available-for-sale securities(b) 33,154 (13,769) 13,180
Recognition of acquired tax benefits - - (2,997)
-------------------------------------------
Net change in value of insurance in force 23,676 (26,049) 973
Balance at beginning of period 25,975 52,024 51,051
-------------------------------------------
Balance at end of period $ 49,651 $ 25,975 $ 52,024
-------------------------------------------
-------------------------------------------
</TABLE>
(a) Included in Realized Investment Gains (Losses) in the statements of income.
(b) Netted from the Change in Net Unrealized Gains on Available-for-Sale
Securities in the statements of shareholders' equity.
The interest rates used to accrue interest on the unamortized value of
insurance in force are consistent with the rates credited on acquired policies
and range from 5% to 8%. Net amortization of the value of insurance in force,
excluding the effects of realized and unrealized investment gains and losses, in
each of the following years is estimated to be: 1999 - $5.9 million; 2000 - $4.9
million; 2001 - $3.8 million; 2002 - $3.3 million; and 2003 - $2.6 million.
6. NON-RECURRING CHARGES
Effective February 10, 1998, John Franco, the Company's Co-Chairman and
Co-Chief Executive Officer, retired. Mr. Franco had shared that title with
Martin H. Ruby since the Company was founded in 1993. As part of the retirement
package for Mr. Franco, the Company recorded a non-recurring charge of $3.6
million in the first quarter of 1998. The charge consisted of (i) a $2.0 million
non-cash charge in connection with the vesting of the unvested portion of the
options held by Mr. Franco to purchase 232,647 shares of the Company's common
stock and (ii) a $1.6 million charge for fulfilling the remaining compensation
related to his employment agreement. Concurrent with Mr. Franco's retirement,
Mr. Ruby assumed the role of Chairman and Chief Executive Officer of the
Company.
In addition, the Company recorded a charge of $1.1 million during the
second quarter of 1998 for registration expenses associated with the Company's
secondary public offering of common stock in May 1998 (see Note 1).
F-18
<PAGE>
The Company recorded non-recurring charges of $14.8 million for the year
ended December 31, 1997 including a non-cash stock-based compensation expense
charge of $8.1 million in connection with the Company's initial public offering
of common stock and other non-recurring costs primarily attributable to the
relocation and consolidation of the Company's operations facilities from Ohio to
Louisville, Kentucky. The stock-based compensation expense charge represents the
aggregate difference between the $15 per share initial public offering price of
Class A common stock and the exercise prices of the then-outstanding options.
7. DEBT
LONG-TERM DEBT
On June 24, 1997, the Company entered into a Credit Agreement to provide
the Company with a new senior revolving credit facility. The maximum amount that
may be borrowed under this Credit Agreement is $75 million, of which $38 million
was drawn on June 24, 1997 and used to repay $38 million of outstanding
borrowings under the Company's prior Credit Agreement, which was terminated.
Borrowings under the new Credit Agreement bear a floating interest rate indexed
to the London Interbank Offered Rate ("LIBOR"). The Credit Agreement has a
variable annual commitment fee which can range from 0.10% to 0.25% of the unused
portion of the borrowing, depending on the ratings of the Company's preferred
stock. The Credit Agreement matures on June 24, 2002, subject to optional
prepayment and contingent upon the Company's compliance with various financial
covenants.
During 1998, in order to limit interest rate risk with respect to long-term
debt, the Company entered into an interest rate swap with a notional amount of
$38 million. Under the terms of the swap, the Company pays a fixed-rate of
interest to a counterparty in exchange for a variable rate that mirrors the
variable rate due on the long-term debt. The swap effectively fixes interest
expense (excluding commitment fees) on long-term debt outstanding at
approximately 6.5%.
PAYABLE TO REINSURER
The Company holds $6.9 million in funds withheld under a modified
coinsurance reinsurance agreement related to a block of variable annuity
contracts. This liability bears a floating interest rate indexed to the LIBOR.
Repayment is scheduled for equal quarterly installments over the next four
years.
8. INCOME TAXES
The components of the provision for income tax expense consist of the
following:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
(IN THOUSANDS) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current $13,803 $ 13,136 $ 2,613
Deferred 1,263 1,003 2,554
-------------------------------------------
Total income tax expense $15,066 $ 14,139 $ 5,167
-------------------------------------------
-------------------------------------------
</TABLE>
F-19
<PAGE>
Significant components of the deferred tax liabilities and assets as of
December 31, 1998 and 1997 were:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Difference between GAAP and tax reserves $ 79,661 $78,404
Net unrealized losses on available-for-sale securities 74,482 -
Net operating loss carryforward 16,263 13,863
Other 19,014 16,285
-----------------------------
Total deferred tax assets 189,420 108,552
Valuation allowance for deferred tax assets (28,033) (36,568)
-----------------------------
Net deferred tax assets 161,387 71,984
Deferred tax liabilities:
Deferred policy acquisition costs 35,689 26,096
Net unrealized gains on available-for-sale securities - 10,931
Other 10,499 3,908
-----------------------------
Total deferred tax liabilities 46,188 40,935
-----------------------------
Total deferred federal income taxes $115,199 $31,049
-----------------------------
-----------------------------
</TABLE>
In the event that deferred tax assets are recognized on deductible
temporary differences for which a valuation allowance was provided at the date
of an acquisition, such benefits will be applied to first reduce the balance of
intangible assets related to the acquisition, such as value of insurance in
force and goodwill.
A full valuation allowance was provided on the difference between deferred
tax assets and liabilities of the Integrity Companies as of the acquisition
date, resulting in zero deferred federal income taxes at that date. Based on the
Integrity Companies' ability to generate taxable income in the post-acquisition
period and projections of future taxable income, the Integrity Companies'
valuation allowance was reduced by $8.0 million, $8.0 million and $11.0 million
during 1998, 1997 and 1996, respectively. As a result of realizing such
benefits, the value of insurance in force was reduced by $3.0 million during
1996 . The balance of goodwill was also reduced by $0.8 million and $0.7 million
during 1998 and 1997, respectively. Additionally, the Company has established a
full valuation allowance on its non-life net operating loss carryforwards.
Realization of these carryforward benefits is dependent on future non-life
earnings.
The Company files a consolidated federal income tax return with its
non-life subsidiaries, but is not currently eligible to file with its life
insurance subsidiaries. Accordingly, Integrity and National Integrity file a
consolidated life insurance company federal income tax return.
F-20
<PAGE>
Income tax expense differs from that computed using the federal income tax
rate of 35% for the following reasons:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
(IN THOUSANDS) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <S> <C> <C>
Income tax expense at statutory rate $ 20,608 $ 14,608 $9,991
Decrease in valuation allowance (7,735) (1,540) (5,490)
Other 2,193 1,071 666
----------------------------------------
Total income tax expense $ 15,066 $ 14,139 $5,167
----------------------------------------
----------------------------------------
</TABLE>
The Company had net operating loss carryforwards of approximately $46.5
million, $39.6 million and $33.7 million at December 31, 1998, 1997 and 1996,
respectively. The net operating loss carryforwards expire in years 2005 to 2018.
9. SHAREHOLDERS' EQUITY
PREFERRED STOCK
During 1993, the Company issued 2,000,000 shares of non-voting 9.5%
Cumulative Perpetual Preferred Stock ("9.5% Preferred Stock"), stated value $25,
in connection with the acquisition of the Integrity Companies. Cash dividends at
a rate of 9.5% per annum per share were payable quarterly. The Company redeemed
all outstanding shares of the 9.5% Preferred Stock on December 15, 1998 at a
price of $25 per share, plus accrued but unpaid dividends.
In July 1998, the Company completed a $75 million offering of non-voting
Series A Fixed/Adjustable Rate Cumulative Preferred Stock, $200 stated value per
share, with an initial coupon rate of 5.575% through June 15, 2003. The net
proceeds from the offering were used to redeem the $50 million of 9.5% Preferred
Stock and the remainder will be used for general corporate purposes.
STOCK SPLIT
Concurrent with the closing of the Offering in June 1997, each share of
common stock was split into 706 shares of common stock. All references to number
of shares, per share amounts and stock options data appearing in the financial
statements and notes thereto have been restated, for all periods presented, to
reflect the stock split.
STOCK OPTIONS
The Company has elected to follow Accounting Principles Board Opinion
("APB") No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations in accounting for its employee stock options. The Company
adopted the disclosure-only option under SFAS No. 123, "Accounting for
Stock-Based Compensation," as of December 31, 1995. If the accounting provisions
of SFAS No. 123 had been adopted, the effects on 1996, 1997 and 1998 net income
would have been immaterial.
The non-cash stock-based compensation charges discussed in Note 6 are a
result of variability
F-21
<PAGE>
in the exercise prices and vesting schedules in the original stock option
plan of December 1993. Such variability no longer exists in the plan and
accordingly no further stock-based compensation charges are anticipated at
this time, unless future amendments to the plan would so justify.
The Company's Amended and Restated Stock Option Plan (the "Plan"),
originally adopted in December 1993, provided for granting of options to
purchase up to 2,432,170 shares of Class A common stock. Such options vest over
a five year period. As of June 30, 1997, all options of the Plan had been
issued.
In June 1997, the Company adopted the 1997 Equity Incentive Plan (the "1997
Equity Plan"). The 1997 Equity Plan provides for the granting of incentive stock
options and nonqualified stock options, stock appreciation rights, restricted
stock, performance units, and performance shares to those officers and other key
employees and consultants with potential to contribute to the future success of
the Company or its subsidiaries; provided that only employees may be granted
incentive stock options. The maximum amount of Class A common stock that may be
granted under the 1997 Equity Plan is 1.6 million shares, subject to adjustment
in accordance with the terms of the 1997 Equity Plan. As of December 31, 1998,
452,250 option shares have been granted under the 1997 Equity Plan which vest
over a four year period.
In addition, 60,000 option shares were awarded to certain members of the
board of directors of the Company during 1998 under the Company's 1998
Non-Employee Director Stock Option Plan (the "1998 Director Plan"). The maximum
amount of Class A common stock that may be granted under the 1998 Director Plan
is 100,000 shares, subject to adjustment in accordance with the terms of the
1998 Director Plan. Such options are fully vested to such directors in
recognition of their tenure as directors of the Company.
F-22
<PAGE>
Information with respect to the Company's stock option plans are as
follows:
<TABLE>
<CAPTION>
Outstanding
----------------------------------
Shares of
Common Stock
Subject to Average
Option Exercise Price
----------------------------------
<S> <C> <C>
Balance at January 1, 1996 1,685,928 $9.33
Options granted 240,040 10.01
Options exercised (3,530) 8.88
Options forfeited (38,830) 10.22
-----------------
Balance at December 31, 1996 1,883,608 10.50
Options granted 887,587 11.45
Options exercised (7,743) 12.23
Options forfeited (342,555) 11.66
-----------------
Balance at December 31, 1997 2,420,897 11.65
Options granted 613,336 19.50
Options exercised (701,208) 11.41
Options forfeited (101,086) 14.04
-----------------
Balance at December 31, 1998 2,231,939 13.77
-----------------
-----------------
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding
-----------------------------------------------------------------------------------
Average Remaining Average
Ranges of Exercise Prices Shares Contractual Life in Years Exercise Price
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 11.14 to $16.71 1,753,689 3.9 $ 11.82
$ 16.72 to $22.53 478,250 9.4 20.93
-----------------------------------------------------------------------------------
2,231,939 6.7 $ 13.77
-----------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
</TABLE>
At December 31, 1998, of the 2,231,939 shares outstanding, 1,279,646 were
exercisable at an average price of $11.58.
F-23
<PAGE>
EARNINGS PER SHARE
The following is a reconciliation of the number of shares (denominator)
used in the basic and diluted earnings per share ("EPS") computations:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------------------------------------------------------
(SHARES IN THOUSANDS) Shares Per Share Shares Per Share Shares Per Share
Amount Amount Amount
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS 23,462 $ 1.59 20,579 $ 1.11 17,498 $ 1.06
Effect of dilutive stock options 900 (0.06) 726 (0.04) -- --
-------------------------------------------------------------------------------
Diluted EPS 24,362 $ 1.53 21,305 $ 1.07 17,498 $ 1.06
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
</TABLE>
STATUTORY INFORMATION
Dividends that the Company may receive from Integrity in any year without
prior approval of the Ohio Insurance Director are limited by statute to the
greater of (i) 10% of Integrity's statutory capital and surplus as of the
preceding December 31 and (ii) Integrity's statutory net income for the
preceding year. For 1999, the maximum dividend payments that may be paid by
Integrity to the Company without prior regulatory approval are $37.8 million.
The consolidated statutory capital and surplus of the Company's insurance
subsidiaries was $246.7 million and $211.8 million at December 31, 1998 and
1997, respectively. In addition, the consolidated statutory asset valuation
reserve ("AVR") of the Company's insurance subsidiaries was $37.8 million and
$24.9 million at December 31, 1998 and 1997, respectively. The AVR is generally
added to statutory capital and surplus for purposes of assessing capital
adequacy against various measures used by rating agencies and regulators.
The National Association of Insurance Commissioners Risk-Based Capital
("RBC") requirements attempt to evaluate the adequacy of a life insurance
company's statutory-basis adjusted capital and surplus in relation to
investment, insurance and other business risks. The RBC formula is used by the
states as an early warning tool to identify possible weakly capitalized
companies for the purpose of initiating regulatory action and is not designed to
be a basis for ranking the financial strength of insurance companies. In
addition, the formula establishes a minimum capital standard which supplements
the prevailing system of low fixed minimum capital and surplus. The RBC
requirements provide for four different levels of regulatory attention depending
on the ratio of the company's adjusted capital and surplus to its RBC. As of
December 31, 1998 and 1997, the adjusted capital and surplus of Integrity and
National Integrity are substantially in excess of the minimum level of RBC that
would require regulatory response.
10. CONTINGENCIES
The Company is currently involved in no material legal or administrative
proceedings. The Company's subsidiaries are currently involved only in routine
legal and administrative proceedings incident to the conduct of their
businesses. The Company believes that none of these proceedings will have a
material adverse impact on the financial position or results of operation of the
Company or its subsidiaries.
F-24
<PAGE>
The number of insurance companies that are under regulatory supervision has
resulted in and is expected to continue to result in assessments by state
guaranty funds to cover losses to policyholders of insolvent or rehabilitated
companies. The Company has accrued for expected assessments.
11. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998:
Net investment spread $22,726 $22,506 $25,658 $28,795
Fee income 4,658 5,414 5,585 5,924
Other income and expenses (16,069) (13,603) (14,302) (16,538)
Realized investment gains (losses) 5,165 1,786 (11,053) 2,228
-----------------------------------------------------
Income before income taxes 16,480 16,103 5,888 20,409
Income tax expense (5,499) (4,208) (210) (5,149)
-----------------------------------------------------
Net income 10,981 11,895 5,678 15,260
Dividends on preferred stock (1,188) (1,188) (2,000) (2,046)
-----------------------------------------------------
Net income applicable to common shareholders 9,793 10,707 3,678 13,214
Exclude, net of tax:
Realized investment (gains) losses (3,357) (1,161) 7,184 (1,448)
Non-recurring charges 3,570 1,105 - -
-----------------------------------------------------
Operating earnings $10,006 $10,651 $10,862 $11,766
-----------------------------------------------------
-----------------------------------------------------
Per common and common equivalent share (diluted):
Net income $ 0.40 $ 0.44 $ 0.15 $ 0.54
Operating earnings $ 0.41 $ 0.44 $ 0.45 $ 0.48
1997:
Net investment spread $18,375 $19,477 $22,087 $22,622
Fee income 5,520 5,538 6,470 7,083
Other income and expenses (15,702) (22,107) (16,105) (14,712)
Realized investment gains 2,231 420 376 165
-----------------------------------------------------
Income before income taxes 10,424 3,328 12,828 15,158
Income tax expense (2,814) (3,185) (3,735) (4,405)
-----------------------------------------------------
Net income 7,610 143 9,093 10,753
Dividends on preferred stock (1,188) (1,188) (1,187) (1,187)
-----------------------------------------------------
Net income (loss) applicable to common shareholders 6,422 (1,045) 7,906 9,566
Exclude, net of tax:
Realized investment gains (1,450) (273) (245) (107)
Non-recurring charges 1,445 9,333 2,489 1,556
Income from defined benefit pension plan
asset management operations (581) (272) (325) (270)
-----------------------------------------------------
Operating earnings $ 5,836 $ 7,743 $ 9,825 $10,745
-----------------------------------------------------
-----------------------------------------------------
Per common and common equivalent share (diluted):
Net income (loss) $ 0.37 $ (0.06) $ 0.33 $ 0.39
Operating earnings $ 0.33 $ 0.42 $ 0.40 $ 0.44
</TABLE>
F-25
<PAGE>
12. SEGMENT INFORMATION
Effective December 31, 1997, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." SFAS No. 131
superseded SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise." SFAS No. 131 establishes standards for the way that public business
enterprises report information about operating segments. SFAS No.131 also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. The adoption of SFAS No. 131 did not
affect results of operations or financial position, but did affect the
disclosure of segment information.
The Company currently has four reportable segments: retail spread products
and options (fixed and indexed annuities and face-amount certificates),
institutional spread products (funding agreements, GICs and certificates),
retail variable fund options (variable annuity mutual fund options), and
corporate and other. 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 marketing partnerships and broker-dealer
operations, unallocated amortization expenses, and other various corporate
expenditures that are not allocated to retail and institutional products.
The Company's reportable segments are based on the earnings characteristics
of the product or service and the markets through which the product or service
is sold. The reportable segments are each managed separately because the impact
of fluctuating interest rates and changes in the equity market environment
affects each segments' products and services differently. The Company evaluates
performance based on operating earnings. Operating earnings represents net
income applicable to common shareholders excluding, net of tax, realized
investment gains and losses, non-recurring charges and for 1997 and 1996, income
from defined benefit pension plan asset management operations which were sold in
1997. The accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies.
F-26
<PAGE>
Segment information as of and for the years ended December 31, 1998, 1997,
and 1996 are as follows.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
(IN THOUSANDS) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Retail spread products and options $ 218,514 $ 220,810 $ 206,296
Institutional spread products 251,252 99,861 37,210
Retail variable fund options 20,085 14,630 10,786
Corporate and other 12,153 19,289 13,572
--------------------------------------------
Consolidated total revenues (investment income and fee income) $ 502,004 $ 354,590 $ 267,864
--------------------------------------------
--------------------------------------------
AMORTIZATION EXPENSE
Retail spread products and options $ 10,387 $ 13,951 $ 10,804
Retail variable fund options 8,171 5,758 3,839
Corporate and other 780 927 1,503
--------------------------------------------
Consolidated total amortization expense $ 19,338 $ 20,636 $ 16,146
--------------------------------------------
--------------------------------------------
EARNINGS
Retail spread products and options $ 38,061 $ 37,618 $ 34,440
Institutional spread products 23,930 9,221 3,241
Retail variable fund options 7,399 5,068 4,827
Corporate and other (3,961) 14 (10,216)
--------------------------------------------
Pretax operating earnings (before preferred stock dividends) 65,429 51,921 32,292
Income taxes on operations (15,722) (13,022) (5,315)
Preferred stock dividends (6,422) (4,750) (4,750)
--------------------------------------------
Operating earnings 43,285 34,149 22,227
Realized investment gains (losses) (1,874) 3,192 907
Non-recurring charges (4,675) (14,823) (5,004)
Income from defined benefit pension plan asset management operations - 1,448 350
Income taxes not related to operating results 656 (1,117) 148
--------------------------------------------
Net income applicable to common shareholders $ 37,392 $ 22,849 $ 18,628
--------------------------------------------
--------------------------------------------
ASSETS (AT END OF THE YEAR)
Retail spread products and options $2,994,339 $3,153,040 $2,789,626
Institutional spread products 4,855,288 2,542,350 891,936
Retail variable fund options 1,682,837 1,192,875 883,483
Corporate and other 253,800 250,159 136,619
--------------------------------------------
Consolidated total assets $9,786,264 $7,138,424 $4,701,664
--------------------------------------------
--------------------------------------------
</TABLE>
F-27
<PAGE>
ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors on Financial Statement Schedules....................................S-2
Schedule I Summary of Investments (Other than Investments in Related Parties)................S-3
Schedule II Condensed Financial Information of Registrant.....................................S-4
Schedule III Supplementary Insurance Information...............................................S-8
Schedule IV Reinsurance.......................................................................S-9
Schedule V Valuation and Qualifying Accounts................................................S-10
</TABLE>
Schedules required by Article 7 of Regulation S-X other than those listed are
omitted because they are not required, are not applicable, or equivalent
information has been included in the financial statements and notes thereto, or
elsewhere herein.
S-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
ON FINANCIAL STATEMENT SCHEDULES
Board of Directors and Shareholders
ARM Financial Group, Inc.
We have audited the consolidated financial statements of ARM Financial
Group, Inc. as of December 31, 1998 and 1997, and for each of the three years in
the period ended December 31, 1998, and have issued our report thereon dated
February 9, 1999, included elsewhere in this Annual Report (Form 10-K). Our
audits also included the financial statement schedules listed in the Index at
Item 14 of this Annual Report (Form 10-K). These schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Louisville, Kentucky
February 9, 1999
S-2
<PAGE>
ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
SCHEDULE I -- SUMMARY OF INVESTMENTS
(OTHER THAN INVESTMENTS IN RELATED PARTIES)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
Amount at
Which Shown
in the
Balance
Type of Investment Cost Value Sheet
- ----------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Fixed maturities:
Bonds:
Industrial and miscellaneous $5,539,607 $5,333,747 $5,333,747
U.S. government and government agencies and authorities 367,260 365,415 365,415
Public utilities 68,243 60,288 60,288
Foreign governments 56,629 48,715 48,715
States, municipalities and political subdivisions 4,536 4,165 4,165
-------------------------------------------
Total fixed maturities 6,036,275 5,812,330 5,812,330
Cash and cash equivalents 525,316 525,316 525,316
Policy loans 129,163 129,163 129,163
Equity securities 33,559 31,745 31,745
Mortgage loans on real estate 14,554 14,554 14,554
-------------------------------------------
Total cash and investments $6,738,867 $6,513,108 $6,513,108
-------------------------------------------
-------------------------------------------
</TABLE>
S-3
<PAGE>
ARM FINANCIAL GROUP, INC. (PARENT COMPANY)
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------------------------
(IN THOUSANDS) 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Fixed maturities, available-for-sale, at fair value $ 28,364 $ 27,115
Equity securities, at fair value - 5,215
Cash and cash equivalents 11,228 7,058
Investments in subsidiaries* 198,952 296,431
Receivable from subsidiaries* 1,586 4,103
Goodwill 2,380 2,525
Deferred federal income taxes 2,248 577
Other assets 14,957 15,922
-------------------------------
Total assets $259,715 $ 358,946
-------------------------------
-------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Long-term debt $ 38,000 $ 38,000
Accounts payable and other liabilities 11,282 13,401
-------------------------------
Total liabilities 49,282 51,401
Shareholders' equity:
Preferred stock 75,000 50,000
Common stock 237 232
Additional paid-in capital 218,268 211,430
Retained earnings (including undistributed net income of subsidiaries) 55,253 25,583
Accumulated other comprehensive income from net unrealized gains
(losses) on available-for-sale securities (138,325) 20,300
-------------------------------
Total shareholders' equity 210,433 307,545
-------------------------------
Total liabilities and shareholders' equity $259,715 $ 358,946
-------------------------------
-------------------------------
</TABLE>
* Eliminated in consolidation.
SEE ACCOMPANYING NOTE.
S-4
<PAGE>
ARM FINANCIAL GROUP, INC. (PARENT COMPANY)
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
(IN THOUSANDS) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Dividends from subsidiary* $ 6,000 $ 14,934 $ 16,000
Management and service fee income* 38,056 37,574 28,901
Investment and other income 4,704 3,848 1,332
Realized investment gains (losses) (521) 1,257 3,712
----------------------------------------
Total revenues 48,239 57,613 49,945
Expenses:
Operating expenses 38,652 38,586 31,813
Interest expense 2,587 2,517 3,161
Amortization:
Acquisition-related deferred charges 405 503 1,503
Goodwill 145 145 145
Non-recurring charges:
Stock-based compensation 2,036 8,145 -
Other 2,639 6,678 5,004
----------------------------------------
Total expenses 46,464 56,574 41,626
----------------------------------------
Income before income tax benefit and equity in undistributed net income of
subsidiaries 1,775 1,039 8,319
Income tax benefit 50 255 242
----------------------------------------
Income before equity in undistributed net income of subsidiaries 1,825 1,294 8,561
Equity in undistributed net income of subsidiaries* 41,989 26,305 14,817
----------------------------------------
Net income $43,814 $ 27,599 $ 23,378
----------------------------------------
----------------------------------------
</TABLE>
* Eliminated in consolidation.
SEE ACCOMPANYING NOTE.
S-5
<PAGE>
ARM FINANCIAL GROUP, INC. (PARENT COMPANY)
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
(IN THOUSANDS) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net cash flows provided by (used in) operating activities $ (890) $ 4,742 $ 2,962
Cash flows provided by (used in) investing activities:
Net (purchases) sales of investments (5,627) (32,229) 2,437
Contribution of capital to subsidiaries (6,850) (40,000) -
----------------------------------------
Net cash flows provided by (used in) investing activities (12,477) (72,229) 2,437
Cash flows provided by (used in) financing activities:
Proceeds from issuance of common stock 3,610 80,308 184
Proceeds from issuance of preferred stock 75,000 - -
Organization, debt and stock issuance costs (1,363) (1,400) -
Redemption of preferred stock (50,000) - -
Principal payment on long-term debt - (2,000) -
Dividends on common stock (3,288) (930) -
Dividends on preferred stock (6,422) (4,750) (4,750)
----------------------------------------
Net cash flows provided by (used in) financing activities 17,537 71,228 (4,566)
Change in cash and cash equivalents 4,170 3,741 833
Cash and cash equivalents at beginning of year 7,058 3,317 2,484
----------------------------------------
Cash and cash equivalents at end of year $ 11,228 $7,058 $3,317
----------------------------------------
----------------------------------------
</TABLE>
SEE ACCOMPANYING NOTE.
S-6
<PAGE>
ARM FINANCIAL GROUP, INC. (PARENT COMPANY)
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
NOTE TO CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. BASIS OF PRESENTATION
The accompanying condensed financial statements should be read in
conjunction with the consolidated financial statements and notes of ARM
Financial Group, Inc. and subsidiaries for the year ended December 31, 1998
included herein.
S-7
<PAGE>
ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION
<TABLE>
<CAPTION>
Customer
Deposits and
Deferred Customer Interest
Policy Deposits in Credited on
Acquisition Separate Investment Customer
Segment Costs Accounts Income* Deposits
- -----------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
December 31, 1998:
Retail spread products and options $ 49,664 $2,813,182 $ 218,514 $ 161,350
Institutional spread products - 5,019,018 251,252 219,388
Retail variable fund options 75,925 1,606,912 - -
Corporate and other - 42,739 10,657 -
---------------------------------------------------------------------
Consolidated $125,589 $9,481,851 $ 480,423 $ 380,738
---------------------------------------------------------------------
---------------------------------------------------------------------
December 31, 1997:
Retail spread products and options $ 35,852 $2,862,828 $ 220,810 $ 159,761
Institutional spread products - 2,624,551 99,861 87,657
Retail variable fund options 51,318 1,129,064 - -
Corporate and other - 41,531 9,308 -
---------------------------------------------------------------------
Consolidated $ 87,170 $6,657,974 $ 329,979 $ 247,418
---------------------------------------------------------------------
---------------------------------------------------------------------
December 31, 1996:
Retail spread products and options $ 19,919 $2,646,180 $ 206,179 $ 148,594
Institutional spared products - 891,936 37,210 32,877
Retail variable fund options 39,082 844,330 - -
Corporate and other - 41,887 6,642 690
---------------------------------------------------------------------
Consolidated $ 59,001 $4,424,333 $ 250,031 $ 182,161
---------------------------------------------------------------------
---------------------------------------------------------------------
<CAPTION>
Other Income
Segment Fee Income and Expenses*
- ---------------------------------------------------------------------------------------
<S> <C> <C>
December 31, 1998:
Retail spread products and options $ - $ (19,103)
Institutional spread products - (7,934)
Retail variable fund options 20,085 (12,686)
Corporate and other 1,496 (20,789)
-------------------------------
Consolidated $ 21,581 $ (60,512)
-------------------------------
-------------------------------
December 31, 1997:
Retail spread products and options $ - $ (23,431)
Institutional spread products - (2,983)
Retail variable fund options 14,630 (9,562)
Corporate and other 9,981 (32,650)
-------------------------------
Consolidated $ 24,611 $ (68,626)
-------------------------------
-------------------------------
December 31, 1996:
Retail spread products and options $ 117 $ (23,262)
Institutional spared products - (1,092)
Retail variable fund options 10,786 (5,959)
Corporate and other 6,930 (27,752)
-------------------------------
Consolidated $ 17,833 $ (58,065)
-------------------------------
-------------------------------
</TABLE>
* Allocation of "investment income" and "other income and expenses" is based
on a number of assumptions and estimates, the results of which would change
if different methods were applied.
S-8
<PAGE>
ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
SCHEDULE IV -- REINSURANCE
<TABLE>
<CAPTION>
Percentage of
Ceded to Assumed from Amount
Other Other Assumed to
Gross Amount Companies Companies Net Amount Net Amount
- --------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1998
Life insurance in force $1,058,943 $1,869,236 $1,635,426 $ 825,133 198.2%
Year Ended December 31, 1997
Life insurance in force $1,137,219 $2,015,951 $1,740,519 $ 861,787 202.0%
Year Ended December 31, 1996
Life insurance in force $1,214,895 $2,056,073 $1,852,732 $1,011,554 183.2%
</TABLE>
S-9
<PAGE>
ARM FINANCIAL GROUP, INC. AND SUBSIDIARIES
SCHEDULE V -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
--------------------------
Charged to
Beginning Charged to Other
Description of Year Expense Accounts Deductions End of Year
- -------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Valuation allowance on deferred tax assets:
1998 $36,568 $ 854 $ -- $ (9,389) (1) $28,033
1997 $38,798 $6,692 $ -- $ (8,922) (1) $36,568
1996 $37,336 $2,517 $9,949 (2) $(11,004) (1) $38,798
</TABLE>
(1) In the event that deferred tax assets are recognized on deductible
temporary differences for which a valuation allowance was provided at the
date of an acquisition, such benefits are applied to first reduce the
balance of intangible assets related to the acquisition, and then income
tax expense. As such, the Company reduced its valuation allowance with an
offsetting reduction to acquisition-related intangible assets such as value
of insurance in force and goodwill. In addition, after acquisition-related
intangible assets were reduced to zero for two of the Company's
subsidiaries, the reduction in valuation allowance resulted in a reduction
of income taxes.
(2) As the acquisition-related valuation allowance described in (1) above was
initially released, the reduction in the intangible assets related to the
acquisition generated additional deferred tax assets. A valuation allowance
was provided for these additional deferred tax assets.
S-10
<PAGE>
[LETTERHEAD]
I, EDWARD J. FREEL, SECRETARY OF STATE OF
DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT
COPY OF THE CERTIFICATE OF DESIGNATION OF ""ARM FINANCIAL GROUP,
INC.'', FILED IN THIS OFFICE ON THE SIXTEENTH DAY OF JULY, A.D.
1998, AT 9 0'CLOCK A.M.
<PAGE>
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 09:00 AM 07/16/1998
981277351 - 2343817
CERTIFICATE OF DESIGNATION OF PREFERENCES AND RIGHTS
OF THE
SERIES A FIXED/ADJUSTABLE RATE CUMULATIVE PREFERRED STOCK
($200.00 Stated Value)
of
ARM FINANCIAL GROUP, INC.
---------------------------
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
---------------------------
The undersigned DOES HEREBY CERTIFY that the following resolution was
duly adopted by the Board of Directors (the ""BOARD'') OF ARM Financial
Group, Inc., a Delaware corporation (hereinafter called the ""CORPORATION''),
by unanimous written consent in lieu of a meeting dated as of July 14, 1998,
with certain of the designations, preferences and rights having been fixed by
the Pricing Committee of the Board (the ""COMMITTEE''), at a meeting on July
15, 1998, pursuant to authority delegated to it by the Board pursuant to
authority delegated to it by the Board pursuant to the provisions of Section
141(c)(1) of the General Corporation Law of the State of Delaware.
RESOLVED that, pursuant to authority expressly granted to and vested
in the Committee by the Board and in the Board by provisions of the
Restated Certificate of Incorporation of the Corporation, as amended
(the ""CERTIFICATE OF INCORPORATION''), the issuance of a series of
Preferred Stock, par value $.01 per share (the ""PREFERRED STOCK''),
which shall consist of 375,000 of the 10,000,000 shares of Preferred
Stock which the Corporation now has authority to issue, is authorized,
and the Board and the Committee, pursuant to the authority expressly
granted to the Committee by the Board pursuant to the provisions of
Section 141(c)(1) of the General Corporation Law of the State of
Delaware and the Certificate of Incorporation, fix the powers,
designations, preferences and relative, participating, optional or other
special rights, and the qualifications, limitations or restrictions
thereof, of the shares of such series (in addition to the powers,
designations, preferences and relative participating, optional or other
special rights, and the qualifications, limitations or restrictions
thereof, set forth in the Certificate of Incorporation which may be
applicable to the Preferred Stock as follows:
1. DESIGNATION AND AMOUNT; FRACTIONAL SHARES. The designation for
such series of the Preferred Stock authorized by this resolution shall
be the Series A Fixed/Adjustable Rate Cumulative Preferred Stock, par
value $.01-pershare, with a stated value of $200.00 per share (the
""Series A Fixed/Adjustable Rate Preferred Stock''). The stated value per
share of Series A Fixed/Adjustable Rate Preferred Stock shall not for
any purpose be considered to be a determination by the board or the
Committee with respect to the capital and surplus of the Corporation. The
number of shares of Series A Fixed/Adjustable Rate Preferred Stock shall
be 375,000. The Series A Fixed/Adjustable Rate Preferred Stock is
issuable in whole shares only.
2. DIVIDENDS. (a) Holders of shares of Series A Fixed/Adjustable
Rate Preferred Stock will be entitled to receive cash dividends, when,
as if declared by the Board or the Committee out of assets of the
corporation legally available for payment. dividends on the Series A Fixed/
Adjustable Rate Preferred Stock, calculated as a percentage of the stated
value, will be payable quarter on March 15, June 15, September 15 and
December 15 of each year (each a ""DIVIDEND PAYMENT DATE''), commencing
September 15, 1998. From the date of issuance of the Series A Fixed/
Adjustable Rate Preferred Stock and continuing through June 15, 2003, the
rate of such dividend will be 5.575% per annum. After June 15, 2003,
dividends on the Series A Fixed/Adjustable Rate Preferred Stock will be
payable quarterly on each dividend payment date at the Applicable Rate
(as defined in paragraph 3) from time to time in effect. The Applicable
Rate per annum for any dividend period beginning on or after June 15, 2003
will be equal to .625% plus the highest of the Treasury Bill Rate, the
Ten-Year Constant Maturity Rate and the Thirty-Year Constant Maturity
Rate (each defined in paragraph 3), as determined in advance of such
dividend period. The Applicable Rate per annum for any dividend period
beginning on or after June 15, 2003 will not be less than 6.05% not greater
than 12.05% (without taking into account any adjustments set forth in
paragraph 2(b).
Dividends on shares of the Series A Fixed/Adjustable Rate
Preferred Stock will be cumulative from the date of initial issuance of
such shares of Series A Fixed/Adjustable Rate Preferred Stock. Dividends
will be payable, in arrears, to holders of record as they appear on the
stock books of the Corporation on such record dates, not more than 60 days
nor less than 10 days preceding the payment dates thereof, as shall be
fixed by the Board or the Committee. The amount of dividends payable for
the initial dividend period or any period shorter than a full dividend
period shall be calculated on the basis of a 360-day year of twelve 30-day
months. No dividends may be declared or paid or set apart for payment on
any Parity Preferred Stock (as defined in paragraph 10(b)) with regard to
the payment of dividends unless there shall also be or have been declared
and paid or set apart for payment on the Series A Fixed/Adjustable Rate
Preferred
<PAGE>
3
Stock, like dividend for all dividend payment periods of the Series A
Fixed/Adjustable Rate Preferred Stock ending on or before the dividend
payment date of such Parity Preferred Stock ratably in proportion to the
respective amounts of dividends (x) accumulated and unpaid or payable on
such Parity Preferred Stock, on the one hand, and (y) accumulated and
unpaid through the dividend payment period or periods of the Series A
Fixed/Adjustable Rate Preferred Stock next preceding such dividend payment
date, on the other hand.
Except as set forth in the preceding sentence, unless full
cumulative dividends on the Series A Fixed/Adjustable Rate Preferred Stock
have been paid, no dividends (other than in common Stock of the
Corporation) may be paid or declared and set aside for payment or other
distribution made upon the Common Stock or any other stock of the
Corporation ranking junior to or on a parity with the Series A
Fixed/Adjustable Rate Preferred Stock as to dividends, nor may any Common
Stock or any other stock of the Corporation ranking junior to or on a party
with the Series A Fixed/Adjustable rate Preferred Stock as to dividends be
redeemed, purchased or otherwise acquired for any consideration (or any
payment be made to or available for a sinking fund for the redemption of
any shares of such stock; PROVIDED, HOWEVER, that any moneys theretofore
deposited in any sinking fund with respect any preferred stock of the
Corporation in compliance with the provision of such sinking fund may
thereafter be applied to the purchase or redemption of such preferred stock
in accordance with the terms of such sinking fund, regardless of whether at
the time of such application full cumulative dividends upon shares of the
Series A Fixed /Adjustable Rate Preferred Stock outstanding to the last
dividend payment date shall have been paid or declared and set apart for
payment) by the Corporation PROVIDED that any such junior or parity
Preferred Stock or Common Stock may be converted into or exchanged for
stock of the Corporation ranking junior to the Series A Fixed/Adjustable
Rate Preferred Stock as to dividends.
(b) If at any times prior to January 15, 2000, one or more amendments
to the Internal Revenue Code of 1986, as amended (the CODE"), are enacted
which reduce the percentage of the dividends received deduction (currently
70%) as specified in Section 243(a)(1) of the Code or any successor
provision (the "DIVIDENDS RECEIVED PERCENTAGE"), the amount of each
dividend (if declared) on each share of the Series A Fixed/Adjustable Rate
Preferred Stock for dividend payments made on or after the effective date
of such change in the Code will be adjusted by multiplying the amount of
the dividend payable determined as described above (before adjustment) by a
factor, which will be the number determined in accordance with the
following formula (the "DRD FORMULA"), and rounding the result to the
nearest cent (with one-half cent rounded up):
<PAGE>
4
1-[35(1-70)]
_____________
1-[35(1-DRP)]
For the purpose of the DRD Formula, "DRP" means the Dividends Received
Percentage (expressed as a decimal) applicable to the dividend in question;
PROVIDED, HOWEVER, that if the Dividends Received Percentage applicable to
the dividend in question shall be less than 50%, the DRP shall equal
50. No amendment to the Code, other than a change in the percentage of the
dividends received deduction set forth in Section 243(a)(1) of the Code, or
any successor provision thereto, will give rise to an adjustment.
Notwithstanding the foregoing provisions, in the event that, with respect
to any such amendment, the Corporation receives either an unqualified
opinion of nationally recognized independent tax counsel selected by the
Corporation or a private letter ruling or similar form of authorization
from the Internal Revenue Service ("IRS") to the effect that such an
amendment does not apply to dividends payable on the Series A
Fixed/Adjustable Rate Preferred Stock, then any such amendment will not
results in the adjustment provided for pursuant to the DRD Formula. The
opinion reference in the previous sentence will be based upon the
legislation amending or establishing the DRP or upon a published
pronouncement of the IRS addressing such legislation
If any such amendment to the Code is enacted after the dividend
payable on a Dividend Payment Date has been declared, the amount of the
dividend payable on such Dividend Payment Date will not be increased;
instead, additional dividends (the "POST DECLARATION DATE DIVIDENDS") equal
to the excess, if any, of (x) the product of the dividend paid by the
Corporation on such Dividend Payment Date and the DRD Formula (where the
DRP used in the DRD Formula would be equal to the greater of the Dividend
Received Percentage and .50) applicable to the dividend in question over
(y) the dividend paid by the Corporation on such Dividend Payment Date,
will be payable (if declared) to holders of Series A Fixed/Adjustable Rate
Preferred stock on the record date applicable to the next succeeding
Dividend Payment Date or, if the Series A Fixed/Adjustable Rate Preferred
Stock is called for redemption prior to such record date, to holders of
Series A Fixed/Adjustable Rate Preferred Stock on the redemption date, as
the case may be, in addition to any other amounts payable on such date.
Notwithstanding the foregoing provisions, if with respect to any such
amendment, the Corporation receives either an unqualified opinion of
nationally recognized independent tax counsel selected by the Corporation
or a private letter ruling or similar form of authorization from the IRS to
the effect that such amendment does not apply to a dividend so payable on
the Series A Fixed/Adjustable Rate Preferred Stock, then such amendment
will not result in the
<PAGE>
5
payment of Post Declaration Date Dividends. The opinion referenced in
the previous sentence will be based upon the legislation amending or
establishing the DRP or upon a published pronouncement of the IRS
addressing such legislation.
If any such amendment to the Code is enacted and the reduction in the
Dividends Received Percentage retroactively applies to a Dividend Payment
Date as to which the Corporation previously paid dividends on the Series A
Fixed/Adjustable Rate Preferred Stock (each, an "AFFECTED DIVIDEND PAYMENT
DATE"), the Corporation will pay (if declared) additional dividends (the
"RETROACTIVE DIVIDENDS") to holders of Series A Fixed/Adjustable Rate
Preferred Stock on the record date applicable to the next succeeding
Dividend Payment Date (or, if such amendment is enacted after the dividend
payable on such Dividend Payment Date has been declared, to holders of
Series A Fixed/Adjustable Rate Preferred Stock on the record date following
the date of enactment) or, if the Series A Fixed/Adjustable Rate Preferred
Stock is called for redemption prior to such record date, to holders of
Series A Fixed/Adjustable Rate Preferred Stock on the redemption date, as
the case may be, in an amount equal to the excess of (x) the product of the
sum of the dividends paid by the Corporation on each Affected Dividend
Payment Date and the DRD Formula (where the DRP used in the DRD Formula
would be equal to the greater of the Dividends Received Percentage and .50)
applied to each Affected Dividend Payment Date over (y) the sum of the
dividends paid by the Corporation on each Affected Dividend Payment Date.
The Corporation will only make one payment of Retroactive Dividends for any
such amendment. Notwithstanding the foregoing provisions, if, with respect
to any such amendment, the Corporation receives either an unqualified
opinion of nationally recognized independent tax counsel selected by the
Corporation or a private letter ruling or similar form of authorization
from the IRS to the effect that such amendment does not apply to a dividend
payable on an Affected Dividend Payment Date for the Series A
Fixed/Adjustable Rate Preferred Stock, then such amendment will not result
in the payment of Retroactive Dividends with respect to such Affected
Dividend Payment Date. The opinion referenced in the previous sentence will
be based upon the legislation amending or establishing the DRP or upon a
published pronouncement of the IRS addressing such legislation.
Notwithstanding the foregoing, no adjustment in the dividends payable
by the Corporation will be made, and no Post Declaration Date Dividends or
Retroactive Dividends will be payable by the Corporation, in respect of the
enactment of any amendment to the Code at any time on or after January 15,
2000 that reduces the Dividends Received Percentage.
In the event that the amount of dividends payable per share of the
Series A Fixed/Adjustable Rate Preferred Stock is adjusted pursuant to the
DRD Formula
<PAGE>
6
and/or Post declaration Date dividends or Retroactive Dividends are to be
paid, the corporation will give notice of each such adjustment and if
applicable, any Post Declaration Date Dividends and Retroactive Dividends
to the holders of records as they appear on the stock books of the
Corporation on such record date, not more than 60 days nor less than 10
days preceding the payment date thereof as shall be fixed by the Board or
the Committee.
Unless the context otherwise requires references herein to dividends
include dividends as adjusted by the DRD Formula, Post Declaration Date
Dividends and Retroactive Dividends. The Corporation's calculation of the
dividends payable, as so adjusted and as certified accurate as to
calculation and reasonable as to method by the independent certified public
accountants then regularly engaged by the Corporation, will be final and
not subject to review absent manifest error.
If the Dividends Received Percentage is reduced 50% or less prior to
January 15,200, the Corporation may at its option, redeem the Series A
Fixed/Adjustable Rated Preferred Stock as a whole but not in part as
described in paragraph 7 hereof.
3. APPLICABLE RATE Except as provided above in paragraph 2, the "APPLICABLE
RATE" per annum for any dividend period beginning on or after June15,2003
will be equal to .625% plus the Effective Rate (as defined herein), but not
less than 6.05% nor greater that 12.05% (without taking into account any
adjustment as described in paragraph 2(b)). The "EFFECTIVE RATE" for any
dividend period beginning on or after Jun 15, 2003 will be equal to the
highest of the Treasury Bill Rate, the Ten-Year Constant Maturity Rate and
the Thirty-Year Constant Maturity Rate (each as defined herein) for such
dividend period. If the Corporation determines in good faith that for any
reason; (i) any one of the Treasury Bill Rate, the Ten-Year Constant
Maturity Rate or the Thirty-Year Constant Maturity Rate cannot be
determined for any dividend period beginning on or after June 15, 2003,
then the Effective Rate for such dividend period will be equal to the
higher of whichever two of such rates can be so determined; (ii) only Year
Constant Maturity Rate can be determined for any dividend period beginning
on or after June 15, 2003, then the Effective Rate for such dividend
period will be equal to whichever such rates can so be determined; or
(iii) none of the Treasury Bill Rate, the Ten-Year Constant Maturity Rate
or the Thirty-Year Constant Maturity Rate can be determined for any
dividend period beginning on or after June 15, 2003, then the Effective
Rate for the preceding dividend period will be continued for such dividend
period.
<PAGE>
7
The "TREASURY BILL RATE" for each dividend period will be the
arithmetic average of the tow most recent weekly per annum market discount
rate (or the one weekly per annum market discount rate if only one such
rate is published during the relevant Calendar Period (as defined herein)
for three- month U.S. Treasury bills, as published weekly by the Federal
Reserve Board (as defined herein) during the Calendar Period immediately
preceding the tenth calendar day preceding the dividend period for which
the dividend rate on the Series A Fixed/Adjustable Rate Preferred Stock is
being determined.
The "TEN-YEAR CONSTANT MATURITY RATE" for each dividend period will be
the arithmetic average of the two most recent weekly per annum Ten-Year
Average Yields (as defined herein)(or the one weekly per annum Ten-Year
Average Yield, if only one such yield is published during the relevant
Calendar Period), as published weekly by the Federal Reserve Board during
the Calendar Period immediately preceding the tenth calendar day preceding
the dividend period for which the dividend rate on the Series A
Fixed/Adjustable Rate Preferred Stock is being determined.
The "THIRTY-YEAR CONSTANT MATURITY RATE" for each dividend period will
be the arithmetic average of the two most recent weekly per annum
Thirty-Year Average Yields (as defined herein) (or the one weekly per annum
Thirty-Year Average Yield, if only one such yield is published during the
relevant Calendar Period), as published weekly by the Federal Reserve Board
during the Calendar Period immediately preceding the tenth calendar day
preceding the dividend period for which the dividend rate on the Series A
Fixed/Adjustable Rate Preferred Stock is being determined.
If the Federal Reserve Board does not publish a weekly annum market
discount rate, Ten-Year Average Yield or Thirty-Year Yield during any
applicable Calendar Period, then the Treasury Bill Rate, Ten-Year Constant
Maturity Rate or Thirty-Year Constant Maturity Rate, as the case may be,
for such dividend period will be the arithmetic average of the two most
recent weekly per annum market discount rates for three-month U.S. Treasury
bill, Ten-Year Average Yields or Thirty-Year Average Yields, as the case
may be (or the one weekly per annum rate, if only one such rate is
published during the relevant Calendar Period), as published weekly during
such Calendar Period by any Federal Reserve Bank or by any U.S. Government
department or agency selected by the Corporation. If any such rate is not
published by the Federal Reserve Board or by any Federal Reserve Bank or by
any U.S. Government department or agency during such Calendar Period then
the Treasury Bill Rate, Ten-Year Constant Maturity Rate or Thirty-Year
Constant Maturity Rate or Thirty-Year Constant Maturity Rate for such
dividend period will be the arithmetic of the tow most recent weekly per
annum (i) in the case of the Treasury Bill Rate, market discount rate (or
the one weekly
<PAGE>
8
per annum market discount rate, if only such rate is published during the
relevant Calendar Period) for all of the U.S. Treasury bills then having
remaining maturities of not less than 80 nor more than 100 days, and (ii)
in the case of the Ten-Year Constant Maturity Rate, average yields to
maturity (or the one weekly per annum average yield to maturity, if only
one such yield is published during the relevant Calendar Period) for all
of the actively traded marketable U.S. Treasury fixed interest rate
securities (other than Special Securities (as defined herein) then
having remaining maturities of not less than eight nor more than
twelve years, and (iii), in the case of the Thirty-Year Constant
Maturity Rate, average yield to maturity (or the one weekly per annum
average yield to maturity, if only one such yield is published during the
relevant Calendar Period) for all of the actively traded marketable U.S.
Treasury fixed interest rate securities (other than Special Securities)
then having remaining maturities of not less than twenty-eight nor more
than thirty years, in each case as published during such Calendar Period
by the Federal Reserve or, if the Federal Reserve Board does not publish
such rates, by any Federal Reserve Bank or by any U.S. Government
department or agency selected by the Corporation. If the Corporation
determines in god faith that for any reason (i) no such U.S. Treasury bill
rates are published as provided above during such Calendar Period or (ii)
the Corporation cannot determine the Treasury Bill Rate for any dividend
period; then the Treasury Bill Rate for such dividend period will be the
arithmetic average of the per annum market discount rates based upon the
closing bids during such Calendar Period for each of the issues of
marketable non-interest-bearing U.S. Treasury securities with a remaining
maturity of not less than 80 nor more than 100 days from the date of each
such quotation, as chosen and quoted daily for each business day in New
York City (or less frequently if daily quotations are not generally
available) to the Corporation by at least three recognized dealers in U.S.
Government securities selected by the Corporation. If the Corporation
determines in good faith that for any reason the Corporation cannot
determine the Ten-Year Constant Maturity Rate or Thirty-Year Constant
Maturity Rate for any dividend period as provided above, then the
applicable rate for such dividend period will be the arithmetic average of
the per annum average yields to maturity based upon the closing bids during
such Calendar Period for each of the issues of actively traded marketable
U.S. Treasury fixed interest rate securities (other than Special
Securities) with a final maturity date (i) in the case of the Ten-Year
Constant Maturity Rate, not lessthan eight nor more than twelve years
from the date of each such quotation, and (ii) in the case of the
Thirty-Year Constant Maturity Rate, not less than twenty-eight nor
more than thirty years from the date of date of each such quotation,
in each case as chosen and quoted daily for each business day in New
York City (or less frequently if daily quotations are not generally
available) to the Corporation by at least three recognized dealers
in the United States.
<PAGE>
9
The Treasury Bill Rate, the Ten-Year Constant Maturity Rate and the
Thirty-Year Constant Maturity Rate will each be rounded to the nearest five
hundredth of percent, with .025% being rounded upward.
The Applicable Rate with respect to each dividend period beginning on
or after June 15, 2003 will be calculated as promptly as practicable by the
Corporation according to the appropriate method described above. The
Corporation will cause notice of each Applicable Rate to be given to the
holders of Series A Fixed/Adjustable Rate Preferred Stock when payment is
made of the dividend for the immediately preceding dividend period.
As used in this paragraph 3, the term "CALENDAR PERIOD" means a period
of fourteen calendar days; the term "FEDERAL RESERVE BOARD" means the Board
of Governors of the Federal Reserve System; the term "SPECIAL SECURITIES"
means securities which can, at the option of the holder, be surrendered at
face value in payment of any Federal estate tax or which provided tax
benefits to the holder and are priced to reflect such tax benefits or which
provide tax benefits to the holder and are priced to reflect such tax
benefits or which were originally issued at a deep or substantial discount;
the term "TERM-YEAR AVERAGE YIELD" means the average yield to maturity for
actively traded marketable U.S. Treasury fixed interest rate securities
(adjusted to constant maturities of ten year); and the term "THIRTY-YEAR
AVERAGE YIELD" means the average yield to maturity for activity traded
marketable U.S. Treasury fixed interest rate securities (adjusted to
constant maturities of thirty years).
4. "LIQUIDATION PREFERENCE". The shares of Series A Fixed/Adjustable
Rate Preferred Stock shall rank, as to liquidation, dissolution or winding
up of the Corporation, prior to the shares of Common Stock and any other
class of stock of the Corporation ranking junior to the Series A
Fixed/Adjustable Rate Preferred Stock as to rights upon liquidation,
dissolution or winding up of the Corporation, so that in the event of any
liquidation, dissolution or winding up of the Corporation, whether
voluntary or involuntary, the holder of the Series A Fixed/Adjustable Rate
Preferred Stock shall be entitled to receive out of the assets of the
Corporation available for distribution to its stockholders, whether from
capital, surplus or earnings, before any distribution is made to holders of
shares of Common Stock or any other such junior stock, an amount equal to
$200.00 per share (the "LIQUIDATION PREFERENCE" of a share of Series A
Fixed/Adjustable Rate Preferred Stock) plus an amount equal to all
dividends (whether or not earned or declared) accrued and accumulated and
unpaid on the shares of Series A Fixed/Adjustable Rate Preferred Stock to
the date of final distribution. The holders of the Series A
Fixed/Adjustable Rate Preferred Stock will not be entitled to receive
the Liquidation Preference until the liquidation preference of any
other class of stock of the Corporation ranking senior to the Series A
Fixed/Adjustable Rate Preferred Stock as to rights upon liquidation,
dissolution or winding up shall
<PAGE>
10
have been paid (or a sum set aside therefor sufficient to provide for
payment) in full. After payment of the full amount of the Liquidation
Preference and such dividends, the holders of shares of Series A
Fixed/Adjustable Rate Preferred Stock will not be entitled to any further
participation in any distribution of assets by the Corporation. If, upon
any liquidation, dissolution or winding up of the Corporation, the assets
of the Corporation, or proceeds thereof, distributable among the holders of
shares of Parity Preferred Stock shall be sufficient to pay in full the
preferential amount aforesaid, then such assets, or the proceeds thereof,
shall be distributable among such holders ratably in accordance with the
respective amount which would be payable on such shares if all amounts
payable thereon were paid in full. For the purposes hereof, neither a
consolidation or merger of the Corporation with or into any other
corporation, nor a merger of any other corporation with or into the
Corporation, nor sale or transfer of all or any part of the Corporation's
assets for cash or securities shall be considered a liquidation,
dissolution or winding up of the Corporation.
5. CONVERSION. The Series A Fixed/Adjustable Rate Preferred Stock
is not convertible into shares of any other class or series of stock of
the Corporation.
6. VOTING RIGHTS. The holders of shares of Series A
Fixed/Adjustable Rate Preferred Stock shall have no voting rights
whatsoever, except for any voting rights to which they may be entitled
under the laws of the State of Delaware, and except as follows:
(a) Whenever, at any time or times, dividends payable on the
shares of Series A Fixed/Adjustable Rate Preferred Stock or on any
Parity Preferred Stock shall be in arrears for an aggregate number
of days equal to six calendar quarters or more, whether or not
consecutive, the holders of the outstanding shares of Series A
Fixed/Adjustable Rate Preferred Stock shall have the right, with
holders of shares of any one or more other class or series of stock
upon which like voting rights have been conferred and are
exercisable (voting together as a class) to elect two of the
authorized number of members of the Board at the Corporation's next
annual meeting of stockholders and at each subsequent annual meeting
of stockholders until such arrearages have been paid or set apart
for payment, at which time such right shall terminate except as
herein or by law expressly provided subject to revesting in the
event of each and every subsequent default of the character above
mentioned. Upon any termination of the right of the holders of
shares of Series A Fixed/Adjustable Rate Preferred Stock as a class
to vote for directors as herein provided, the term of office of all
directors then in office elected by the holders of shares of Series
A Fixed/Adjustable Rate Preferred Stock shall terminate immediately.
<PAGE>
11
Any director who shall have been so elected pursuant to this paragraph
may be removed at any time, either with or without cause. Any vacancy
thereby created may be filled only by the affirmative vote of the
holders of shares of Series A Fixed/Adjustable Rate Preferred Stock voting
separately as a class (together with the holders of shares of any other
class or series of stock upon which like voting rights have been
conferred and are exercisable). If the office of any director elected by
the holders of shares of Series A Fixed/Adjustable Rate Preferred Stock
voting as a class becomes vacant for any reason other than removal from
office as aforesaid, the remaining director elected pursuant to this
paragraph may choose a successor who shall hold office for the unexpired
term in respect of which such vacancy occurred. At elections for such
directors, each holder of shares of Series A Fixed/Adjustable Rate
Preferred Stock shall be entitled to one vote for each share held (the
holders of shares of any other class or series of preferred stock having
like voting rights being entitled to such number of votes, if any, for
each share of such stock held as may be granted to them).
(b) So long as any shares of Series A Fixed/Adjustable Rate
Preferred Stock remain outstanding, the consent of the holders of at least
two-thirds of the shares of Series A Fixed/Adjustable Rate Preferred
Stock outstanding at the time and all other classes or series of stock
upon which like voting rights have been conferred and are exercisable
(voting together as a class) given in person or by proxy, either in
writing or any any meeting called for the purpose, shall be necessary to
permit, effect or validate any one or more of the following.
(i) the issuance or increase of the authorized amount of any
class or series of shares ranking prior (as that term is defined in
paragraph 10(a) hereof) to the shares of the Series A
Fixed?Adjustable Rate Preferred Stock or
(ii) the amendment, alteration repeal, whether by merger,
consolidation or otherwise, of any of the provisions of the
Certificate of Incorporation (including this resolution or any
provisions hereof) that would materially and adversely affect any
power, preference, or special right of the shares of Series A
Fixed?Adjustable Rate Preferred Stock or of the holders thereof;
PROVIDED, HOWEVER, that any increase in the amount of authorized Common
Stock or authorized Preferred Stock or any increase or decrease in the
number of shares of any series of Preferred Stock or the creation and
issuance of other series of Common Stock or Preferred Stock in each case
<PAGE>
12
ranking on a parity with or junior to the shares of Series A
Fixed?Adjustable Rate Preferred Stock with respect to the payment
of dividends and the distribution of assets upon liquidation,
dissolution or winding up, shall not be deemed to materially and
adversely affect such powers, preferences or special rights.
(c) The foregoing voting provisions shall not apply if, at or
prior to the time when the act with respect to which such vote
would otherwise be required shall be effected, all outstanding
shares of Series A Fixed?Adjustable Rate Preferred Stock shall have
been redeemed or called for redemption and sufficient funds shall
have been deposited in trust to effect such redemption.
7. REDEMPTION. The shares of the Series A Fixed/Adjustable Rate
Preferred Stock may be redeemed at the option of the Corporation, as a
whole, or from time to time in part, at any time, upon not less than
thirty nor more than sixty days' prior notice mailed to the holders of
the shares to be redeemed at their addresses as shown on the stock books
of the Corporation; PROVIDED, HOWEVER, that shares of the Series A
Fixed/Adjustable Rate Preferred Stock shall not be redeemable prior to
June 15, 2003, except as stated below. Subject to the foregoing, on or
after such date, shares of the Series A Fixed/Adjustable Rate Prefrerred
Stock are redeemable at $200.00 per share plus accrued and unpaid dividends
(whether or not declared and including any increase in dividends payable
due to changes in the Dividends Received Percentage) from the immediately
preceding Dividend Payment Date to the date fixed for redemption (but
without any accumulation for unpaid dividends for prior dividend periods on
the Series A Fixed/Adjustable Rate Preferred Stock).
If full cumulative dividends on the Series A Fixed/Adjustable Rate
Preferred Stock have not been paid, the Series A Fixed/Adjustable Rate
Preferred Stock may not be redeemed in part and the Corporation may not
purchase or acquire any shares of the Series A Fixed/Adjustable Rate
Preferred Stock otherwise than pursuant to a purchase or exchange offer
made on the same terms to all holders of the Series A Fixed/Adjustable
Rate Preferred Stock. If fewer than all outstanding shares of Series A
Fixed/Adjustable Rate Preferred Stock are to be redeemed, the
Corporation will select those to be redeemed by lot or a substantially
equivalent method.
If a notice of redemption has been given pursuant to this paragraph 7
and if, on or before the date fixed for redemption, the funds necessary
for such redemption shall have been set aside by the Corporation,
separate and apart from its other funds in trust for the pro rate
benefit of the holders of the shares of Series A Fixed/Adjustable Rate
Preferred Stock so called for redemption, then,
<PAGE>
13
notwithstanding that any certificates for such shares have not been
surrendered for cancellation, on the redemption date dividends shall
cease to accrue on the shares to be redeemed, and at the close of
business on the redemption date the holders of such shares shall cease
to be stockholders with respect to such shares and shall have no interest
in or claims against the Corporation by virtue thereof and shall have no
voting or other rights with respect to such shares, except the right to
receive the moneys payable upon surrender (and endorsement, if required
by the Corporation) of their certificates, and the shares evidenced
thereby shall no longer be outstanding. Subject to applicable escheat
laws, any moneys so set aside by the Corporation an unclaimed a the end
of two years form the redemption date shall revert to the general funds
of the Corporation for the payment of the amounts payable upon such
redemption. Any interest accrued on funds so deposited shall be paid to
the Corporation from time to time.
Notwithstanding the foregoing provisions, if at any time prior to
January 15, 2000, one or more amendments to the Code are enacted that
reduce the Dividends Received Percentage to 50% or less, and as a
result, the amount of dividends of the Series A Fixed/Adjustable Rate
Preferred Stock payable on any Dividend Payment Date may be adjusted
upwards as described above in paragraph 2, the Corporation, at its
option, may redeem all, but not less than all, of the outstanding share
of the Series A Fixed/Adjustable Rate Preferred Stock, provided that,
within sixty days of the date on which an amendment to the Code is
enacted that reduces the Dividends Received Percentage to 50% or less,
the Corporation sends notice to holders of the Series A Fixed/Adjustable
Rate Preferred Stock of such redemption. Any redemption of the Series A
Fixed/Adjustable Rate Preferred Stock will be at a redemption price of
$204.00 per share (equivalent to $31.00 per depositary share), plus
accrued and unpaid dividends (whether or not declared and including any
increase in dividends payable due to changes in the Dividends Received
Percentage) from the immediately preceding Dividends Payment Date or the
date of original issuance of the Series A Fixed/Adjustable Rate
Preferred Stock, as the case may be, to the date fixed for redemption
(but without any accumulation for unpaid dividends for prior dividend
periods on the Series A Fixed/Adjustable Rate Preferred Stock).
8. AUTHORIZATION AND ISSUANCE OF OTHER SECURITIES. No consent of
the holders of the Series A Fixed/Adjustable Rate Preferred Stock shall
be required for (a) the creation of any kind of the Corporation (b) the
<PAGE>
14
creation, or increase or decrease in the amount, of any class or
series of stock of the Corporation not ranking prior as to dividients or
upon liquidation, dissolution or winding up to the Series A
Fixed/Adjustable Rate Preferred Stock or (c) any increase or decrease in
the amount of authorized Common Stock or any increase, decrease of
change in the par value thereoif or in any other terms thereof.
9. AMENDMENT OF RESOLUTION. The Board and the Committee each
reserves the right by subsequent amendment of this resolution from time
to time to increase or decrease the number of shares that constitute the
Series A Fixed/Adjustable Rate Preferred Stock (but not below the number
of shares thereof then outstanding) and in other respects to amend this
resolution within the limitations provided by law, this resolution
within the limitations provided by law, this resolution and the
Certificate of Incorporation.
10. RANK. For the purposes of this resolution, any stock of any
class or classes of the Corporation shall be deemed to rank:
(a) prior to shares of the Series A Fixed/Adjustable Rate
Preferred Stock, either as to divides or upon liquidation,
dissolutionor winding up, or both, if the holders of stock of such
class or classes shall be entitled by the terms thereof to the
receipt of dividends or of amounts distributable upon liquidation,
dissolution or winding up, as the case may be, in preference or
priority to the holders of shares of the Series A Fixed/Adjustable
Rate Preferred Stock,
(b) on a parity with shares of the Series A Fixed/Adjustable
Rate Preferred Stock, either as to dividends or upon liquidation,
dissolution or winding up, or both, whether or not the dividend rates,
dividend payment dates, or redemptionor liquidation prices per share
thereof be different from those of the Series A Fixed/Adjustable Rate
Preferred Stock, if the holders of stock of such class or classes
shall be entitled by the terms thereof to the receipt of dividends or
of amounts distributed upon liquidation, dissolution, or winding up,
as the case may be, in proportion to their respective dividend rates
or liquidation prices, without preference or priority of one over the
other as between the holders of such stock and the holders of shares
of Series A Fixed/Adjustable Rate Preferred Stock (the term ""PARTY
PREFERRED STOCK'' being used to refer to any stock ona parity with
the shares of Series A Fixed/Adjustable Rate Preferred Stock, either
asto dividends or upon liquidation, dissolution or winding up or
both as the context may require), and
(c) junior to shares of the Series A Fixed/Adjustable Rate
Preferred Stock, either as to dividends or upon liquidation,
dissolution or winding up or both. If such class shall be Common
Stock or if the holders of the Series A Fixed/Adjustable Rate
Preferred Stock shall be entitled to the receipt of dividends
r of amounts distributable upon liquidation, dissolution or
winding up, as the case may be, in preference or priority to
the holders of stock of such class or classes.
<PAGE>
15
The Series A Fixed/Adjustable Rate Preferred Stock shall be entitled
to the receipt of dividends or of amounts distributable upon liquidation,
dissolution or winding up, to the Common Stock and on a parity with the
Corporation 9-1/2% Cumulative Perpetual Preferrer Stock, with a
liquidation value of $200.00 per share.
<PAGE>
16
IN WITNESS WHEREOF, ARM Financial Group, Inc. has caused this
Certificate to be made under the seal of the Corporation and signed by Martin
H. Ruby, its Chairman of the Board of Directors and Chief Executive officer
(Principal Executive Officer), and attested by Robert H. Scott, its Executive
Vice President, General Counsel and Secretary, this 16th day of July, 1998.
ARM FINANCIAL GROUP, INC.
By: /s/ Martin H. Ruby
-----------------------
Name: Martin H. Ruby
Title: Chairman of the Board of Directors
and Chief Executive Officer
(Principal Executive Officer)
[SEAl]
Attest:
/s/ P A Scott
- -------------------------
<PAGE>
Exhibit 10.4
AMENDMENT NO. 1 TO THE
ARM FINANCIAL GROUP, INC. 1997 EQUITY INCENTIVE PLAN
WHEREAS, ARM Financial Group, Inc., a Delaware corporation (the "Company"),
has adopted the ARM Financial Group, Inc. 1997 Equity Incentive Plan (the
"Plan"; terms used herein without definition shall have the meanings ascribed to
them as set forth in the Plan);
WHEREAS, Section 17 of the Plan permits the Compensation Committee of the
Board of Directors of the Company to amend the Plan at any time and from time to
time in whole or in part; and
WHEREAS, the Compensation Committee desires to amend the Plan in the manner
set forth below.
NOW, THEREFORE, the Plan is hereby amended as follows:
1. Paragraph (a) under the definition of "CHANGE IN CONTROL" in Section 2
of the Plan is hereby amended by deleting reference to "20%" and substituting in
its place "51%".
2. Except as set forth herein, the Plan is hereby ratified and confirmed
in all respects.
IN WITNESS WHEREOF, this Amendment No. 1 to the ARM Financial Group, Inc.
1997 Equity Incentive Plan has been executed as of the 22nd day of February,
1999.
ARM FINANCIAL GROUP, INC.
By:
----------------------------------
Name: Martin H. Ruby
Title: Chairman and Chief Executive Officer
ATTESTED TO:
By:
---------------------------------
Name: Patricia L. Tackett
Title: Secretary
<PAGE>
Exhibit 10.6
AMENDMENT NO. 1 TO THE
ARM FINANCIAL GROUP, INC.
1998 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
WHEREAS, ARM Financial Group, Inc., a Delaware corporation (the
"Company"), has adopted the ARM Financial Group, Inc. 1998 Non-Employee
Director Stock Option Plan (the "Plan"; terms used herein without definition
shall have the meanings ascribed to them as set forth in the Plan);
WHEREAS, Section 12 of the Plan permits the Board of Directors of the
Company to amend the Plan at any time and from time to time in whole or in
part; and
WHEREAS, the Board of Directors desires to amend the Plan in the
manner set forth below.
NOW, THEREFORE, the Plan is hereby amended as follows:
1. The definition of "MORGAN STANLEY STOCKHOLDERS" in Section 2 of
the Plan is hereby deleted in its entirety.
2. Section 4 of the Plan is hereby amended in its entirety to read as
follows:
Options awarded pursuant to the Plan shall be granted only to
active members of the Board who are not, as of the date of any Option
grants, employees of the Company or any of its Subsidiaries or
affiliates (each an "ELIGIBLE DIRECTOR", and collectively, the
"ELIGIBLE DIRECTORS").
3. The first sentence of Section 5(a)(ii) of the Plan is hereby
amended in its entirety to read as follows:
On the date of an Eligible Director's initial election or
appointment to the Board or the date on which a member of the Board
becomes an Eligible Director (other than a Director who was an
employee of the Company at any time during the 12 calendar months prior
to such date), such Eligible Director (including any Eligible Director
reelected or reappointed after a period of at least 12 calendar months
during which he did not serve on the Board) shall be granted an Initial
Award consisting of an Option to purchase 10,000 shares of Common Stock.
4. Except as set forth herein, the Plan is hereby ratified and
confirmed in all respects.
<PAGE>
IN WITNESS WHEREOF, this Amendment No. 1 to the ARM Financial Group,
Inc. 1998 Non-Employee Director Stock Option Plan has been executed as of the
18th day of February, 1999.
ARM FINANCIAL GROUP, INC.
By: /s/Martin H. Ruby
--------------------------------------
Name: Martin H. Ruby
Title: Chairman and Chief Executive Officer
ATTESTED TO:
By: /s/ Patricia L. Tackett
---------------------------------------
Name: Patricia L. Tackett
Title: Secretary
<PAGE>
EXHIBIT 10.14
AMENDMENT dated as of october 23, 1998 (this ""Amendment''),
to the Credit Agreement dated as of June 24, 1997, as amended by
the Release and Amendment dated as of December 15, 1997 and the
Amendment dated as of April 20, 1998 (the ""Credit Agreement''),
among ARM FINANCIAL GROUP, INC., a Delaware corporation (the
"Borrower"), the financial institutions from time to time party
thereto (the ""Lenders'') and THE CHASE MANHATTAN BANK, a New
York banking corporation, as agent for the Lenders (in such
capacity, the ""Agent'').
WHEREAS the Borrower has requested that the Lenders amend certain
provisions of the Credit Agreement as set forth herein;
WHEREAS the Lenders are willing, on the terms, subject to the
conditions and to the extent set forth below, to provide such amendments; and
WHEREAS capitalized terms used and not otherwise defined herein shall
have the meanings assigned to them in the Credit Agreement.
NOW, THEREFORE, in consideration of the premises and the
agreements, provisions and covenants herein contained, the parties hereto
hereby agree, on the terms and subject to the conditions set forth herein, as
follows:
SECTION 1. AMENDMENT TO CREDIT AGREEMENT
(a) Section 6.04(e) of the Credit Agreement is amended in its entirety to
read as follows:
""(e) investments consisting of loans to ARM Capital Advisors
Holdings, LLC in connection with the purchase of ARM Capital Advisors LLC and
the provision of working capital loans to ARM Capital Advisors, LLG in an
aggregate amount for all such loans not in excess of $6,000,000 at any time
outstanding.''
(b) Section 6.04(f) of the Credit Agreement is amended in its
entirety to read as follows:
"(f) investments in (including cash capital contributions to) the
Designated Subsidiaries in an amount not greater in the aggregate for both
such Subsidiaries than $16,500,000 plus any amounts contributed in
satisfaction of amounts that are due from but have not been paid by
Integrity under the Total Return Swap:"
SECTION 2. REPRESENTATIONS AND WARRANTIES. The Borrower hereby
represents and warrants to each Lender, on and as
<PAGE>
of the date hereof, and after giving effect to this Amendment, that:
(a) the representations and warranties set forth in Article III
of the Credit Agreement are true and correct in all material respects on
and as of the date hereof, except to the extent such representations and
warranties relate to an earlier date; and
(b) no Event of Default or Default has occurred and is continuing.
SECTION 4. EFFECTIVENESS. The amendments to the Credit Agreement
set forth in Section 1 shall become effective only upon receipt by the Agent
of duly executed counterparts hereof which, when taken together, bear the
authorized signatures of the Borrower and the Required Lenders.
SECTION 3. GOVERNING LAW. THIS AMENDMENT SHALL BE CONSTRUED IN
ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE STATE OF NEW YORK.
SECTION 5. COUNTERPARTS. This Amendment may be executed in any
number of counterparts, each of which shall be an original but all of which,
when taken together, shall constitute but one instrument. Delivery of an
executed counterpart of a signature page of this Amendment by facsimile
transmission shall be as effective as delivery of a manually executed
counterpart of this Amendment.
SECTION 6. EXPENSES. The Borrower agrees to pay all expenses
incurred by the Agent in connection with the preparation, execution and
delivery of this Amendment, including the fees, charges and disbursements of
counsel.
SECTION 7. HEADINGS. Section headings used herein are for
convenience of reference only, are not part of this Amendment and are not to
affect the construction of, or to be taken into consideration in interpreting,
this Amendment.
SECTION 8. EFFECT OF THIS AMENDMENT GENERALLY. Except as
expressly set forth herein, this Amendment shall not by implication or
otherwise limit, impair, constitute a waiver of, or otherwise affect the
rights and remedies of the Lenders under the Credit Agreement or any other
Loan Document, and shall not alter, modify, amend or in any way affect any of
the terms, conditions, obligations, covenants or agreements contained in the
Credit Agreement or any other Loan Document, all of which are ratified and
affirmed in all respects and shall continue in full force and effect. Nothing
herein shall be deemed to entitle the Borrower to a consent to, or a waiver,
amendment, modification or other change of, any of the terms, conditions,
obligations, covenants or agreements contained in the Credit Agreement or
any other loan
<PAGE>
Document in similar or different circumstances. This Amendment shall apply
and be effective only with respect to the provisions of the Credit Agreement
specifically referred to herein.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
to be duly executed by their respective authorized officers as of the day and
year first above written.
ARM FINANCIAL GROUP, INC.,
by /s/ Peter S. Resnik
----------------------------
Name: Peter S. Rsenik
Title: Treasurer
by /s/ John R. Lindholm
----------------------------
Name: John R. Lindholm
Title: President, Retail Bus. Div
THE CHASE MANHATTAN BANK,
individually, as Administrative
Agent,
by /s/ Peter Plattin
----------------------------
Name: Peter Plattin
Title: Vice President
BANK OF TOKYO-MITSUBISHI TRUST
COMPANY.
by /s/ J. Beckwith
----------------------------
Name: J. Beckwith
Title: Vice President
DEUTSCHE BANK, AG, NEW YORK
AND/OR CAYMAN ISLANDS BRANCHES,
by /s/ John S. McGill
----------------------------
Name: John S. McGill
Title: Vice President
by /s/ Gayma Z. Shivnarain
----------------------------
Name: Gayma Z. Shivnarain
Title: Vice President
<PAGE>
DRESDNER BANK AG, NEW YORK
BRANCH AND GRAND CAYMAN BRANCH,
by
----------------------------
Name:
Title:
by
----------------------------
Name:
Title:
THE FIRST NATIONAL BANK OF
CHICAGO,
by /s/ Frederick T. Crawford
----------------------------
Name: Frederick T. Crawford
Title: First Vice President
FIRST UNION NATIONAL BANK,
by /s/ Thomas L. Stitchberry
----------------------------
Name: Thomas L. Stitchberry
Title: SVP
PNC BANK, N.A.
by
----------------------------
Name:
Title:
SUNTRUST BANK, CENTRAL FLORIDA,
NATIONAL ASSOCIATION,
by
----------------------------
Name:
Title:
<PAGE>
Exhibit 10.15
AMENDMENT dated as of October 30, 1998 (this "Amendment"),
to the Credit Agreement dated as of June 24, 1997, as amended by
the Release and Amendment dated as of December 15, 1997, the
Amendment dated as of April 20, 1998 and the Amendment dated
as of October 23, 1998 (the "Credit Agreement"), among ARM
FINANCIAL GROUP INC., a Deleware corporation (the Borrower"),
the financial institutions from time to time party thereto
(the "Lenders") and THE CHASE MANHATTAN BANK, a New York
banking corporation, as agent for the Lenders (in such
capacity, the "Agent").
WHEREAS the Borrower has requested that the Lenders amend certain
provisions of the Credit Agreement as set forth herein;
<PAGE>
2
long as no Default or Event has occurred and is continuing or would
occur after giving effect thereto, (i) the Borrower may declare and pay
dividends with respect to the Preferred Stock as provided in the
Certificate of Designation, (ii) the Borrower may declare and pay in
cash dividends on, and may make redemptions and repurchases of, any of
its capital stock other than the Preferred Stock so long as the amounts
paid in any fiscal year in connection with such dividends, redemptions
and repurchases do not exceed the greater of (A) one-third of the
Borrower's Net Income in respect of the immediately preceding fiscal
year and (B) $3,000,000, and (iii) the Borrower may redeem its
outstanding 9.50% Cumulative Perpetual Preferred Stock, $25.00 stated
value per share, on or about December 15, 1998, with proceeds of the
issuance and sale of its Preferred Stock; and (C) the Borrower may
directly or indirectly redeem, purchase, retire or otherwise acquire
for any value any shares of its Class A Common Stock in accordance with
the terms of the Stock Option plan.
SECTION 2. REPRESENTATIONS AND WARRANTIES. The Borrower hereby
represents and warrants to each Lender, on and as of the date hereof, and
after giving effect to this Amendment, that;
(a) the representations and warranties set forth in Article III
of the Credit Agreement are true and correct in all material respects on
and as of the date hereof, except to the extent such representations and
warranties relate to an earlier date; and
(b) no Event of Default or Default has occurred and is continuing.
SECTION 3. EFFECTIVENESS. The amendments to the Credit Agreement
set forth in Section 1 shall become effective only upon receipt by the Agent
of duly executed counterparts hereof which, when taken together, bear the
authorized signatures of the Borrower and the Required Lenders.
SECTION 4. GOVERNING LAW. THIS AMENDMENT SHALL BE CONSTRUED IN
ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE STATE OF NEW YORK.
SECTION 5. COUNTERPARTS. This Amendment may be executed in any
number of counterparts, each of which shall be an original but all of which,
when taken together, shall constitute but one instrument. Delivery of an
executed counterpart of a signature page of this Amendment by facsimile
transmission shall be as effective as delivery of a manually executed
counterpart of this Amendment.
SECTION 6. EXPENSES. The Borrower agrees to pay all expenses
incurred by the Agent in connection with the preparation, execution and
delivery of this Amendment, including the fees, charges and disbursements of
counsel.
<PAGE>
3
SECTION 7. HEADINGS. Section headings used herein are for
convenience of reference only, are not part of this Amendment and are not to
affect the construction of, or to be taken into consideration in
interpreting, this Amendment.
SECTION 8. EFFECT OF THIS AMENDMENT GENERALLY. Except as
expressly set forth herein, this Amendment shall not by implication or
otherwise limit, impair, constitute a waiver of, or otherwise affect the
rights and remedies of the Lenders under the Credit Agreement or any other
Loan Document, and shall not alter, modify, amend or in any way affect any of
the terms, conditions, obligations, covenants or agreements contained in the
Credit Agreement or any other Loan Document, all of which are ratified and
affirmed in all respects and shall continue in full force and effect. Nothing
herein shall be deemed to entitle the Borrower to a consent to, or a waiver,
amendment, modification or other change of, any of the terms, conditions,
obligations, covenants or agreements contained in the Credit Agreement or any
other Loan Document in similar or different circumstances. This Amendment
shall apply and be effective only with respect to the provisions of the
Credit Agreement specifically referred to herein.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
to be duly executed by their respective authorized officers as of the day and
year first above written.
ARM FINANCIAL GROUP, INC.
by /s/ Peter S. Resnik
--------------------
Name: Peter S. Resnik
Title: Treasurer
by /s/ Edward L. Zeman
--------------------
Name: Edward L. Zeman
Title: CFO
THE CHASE MANHATTAN BANK,
individually, as Administrative
agent,
by /s/ Peter F. Plattin
-------------------------------
Name: Peter F. Plattin
Title: Vice President
<PAGE>
4
BANK OF TOKYO-MITSUBISHI TRUST
COMPANY,
by /s/ J. Beckwith
---------------
Name: J. BECKWITH
Title: Vice President
<PAGE>
4
DEUTSCHE BANK AG, NEW YORK
AND/OR CAYMAN ISLAND BRANCHES,
by /s/ John S. McGill
------------------
Name: John S. McGill
Title: Vice President
by /s/ Eckhard Osenberg
--------------------
Name: Eckhard Osenberg
Title: Vice President
DRESDNER BANK AG, NEW YORK
BRANCH AND GRAND CAYMAN BRANCH,
by /s/ Robert P. Donohue
---------------------
Name: ROBERT P. DONOHUE
Title: VICE PRESIDENT
by /s/ Lloyd C. Stevens
--------------------
Name: LLOYD C. STEVENS
Title: Vice President
THE FIRST NATIONAL BANK OF
CHICAGO,
by /s/ [Illegible]
------------------------------
Name: [Illegible]
Title: Corporate Banking
Officer
FIRST UNION NATIONAL BANK,
by /s/ T. L. Stitchberry
----------------------
Name: T. L. Stitchberry
Title: SVP
<PAGE>
5
PNC BANK, N.A.
by /s/ Ralph M. Bowman
-------------------
Name: Ralph M. Bowman
Title: Vice President
SUNTRUST BANK, CENTRAL FLORIDA,
NATIONAL ASSOCIATION,
by
-------------------------------
Name:
Title:
<PAGE>
EXHIBIT 10.16
AMENDMENT dated as of January 6, 1999 (this "Amendment"),
to the Credit Agreement dated as of June 24, 1997, as amended by
the Release and Amendment dated as of December 15, 1997, the
Amendment dated as of April 20, 1998, the Amendment dated as of
October 23, 1998 and the Amendment dated as of October 30, 1998
(the "Credit Agreement"), among ARM FINANCIAL GROUP, INC., a
Delaware corporation (the "Borrower"), the financial institutions
from time to time party thereto (the "Lenders") and THE CHASE
MANHATTAN BANK, a New York banking corporation, as agent for the
Lenders (in such capacity, the "Agent").
WHEREAS, the Borrower has requested that the Lenders amend certain
provisions of the Credit Agreement as set forth herein;
WHEREAS, the Lenders are willing, on the terms, subject to the
conditions and to the extent set forth below, to provide such amendments; and
WHEREAS, capitalized terms used and not otherwise defined herein
shall have the meanings assigned to them in the Credit Agreement.
NOW, THEREFORE, in consideration of the premises and the
agreements, provisions and covenants herein contained, the parties hereto
hereby agree, on the terms and subject to the conditions set forth herein,
as follows:
SECTION 1. AMENDMENT TO CREDIT AGREEMENT
Subparagraph (iii) of the definition of "Designated Activity" in section 1.01
of the Credit Agreement is amended in its entirety to read as follows:
"(iii) the acquisition and maintenance by such Person of fixed
income securities with an average credit quality of the higher of
(a) A or (b) the average credit quality required by the investment
guidelines set forth in the Investment Management Agreement
(or other similar document) executed as part of the issuance of
face-amount certificates by such Person:"
SECTION 2. AMENDMENT TO CREDIT AGREEMENT Section 6.01(m) of the
Credit Agreement is amended in its entirety to read as follows:
"(m) Indebtedness of the Designated Subsidiaries (evidenced by or
incurred pursuant to any agreements, instruments, commitments or
arrangements, irrespective of their individual or aggregate face
amount, in each case arising from or related to one or more
Designated Activities) in an aggregate outstanding principal
<PAGE>
amount not to exceed at any time $1,150,000,000 plus accrued but
unpaid interest thereon."
SECTION 3. REPRESENTATIONS AND WARRANTIES. The Borrower hereby
represents and warrants to each Lender, on and as of the date hereof, and
after giving effect to this Amendment, that:
(a) the representations and warranties set forth in Article III of
the Credit Agreement are true and correct in all material respects on and
as of the date hereof, except to the extent such representations and
warranties relate to an earlier date; and
(b) no Event of Default has occurred and is continuing.
SECTION 4. EFFECTIVENESS. The amendments to the Credit Agreement
set forth in Sections 1 and 2 shall become effective only upon receipt by the
Agent of duly executed counterparts hereof which, when taken together, bear
the authorized signatures of the Borrower and the Required Lenders.
SECTION 5. GOVERNING LAW. THIS AMENDMENT SHALL BE CONSTRUED IN
ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE STATE OF NEW YORK.
SECTION 6. COUNTERPARTS. This Amendment may be executed in any
number of counterparts, each of which shall be an original but all of which,
when taken together, shall constitute but one instrument. Delivery of an
executed counterpart of a signature page of this Amendment by facsimile
transmission shall be as effective as delivery of a manually executed
counterpart of this Amendment.
SECTION 7. EXPENSES. The Borrower agrees to pay all expenses
incurred by the Agent in connection with the preparation, execution and
delivery of this Amendment, including the fees, charges and disbursement of
counsel.
SECTION 8. HEADINGS. Section headings used herein are for the
convenience of reference only, are not part of this Amendment and are not to
affect the construction of, or to be taken into consideration in
interpreting, this Amendment.
SECTION 9. EFFECT OF THIS AMENDMENT GENERALLY. Except as
expressly set forth herein this Amendment shall not by implication or
otherwise limit, impair, constitute a waiver of, or otherwise affect the
rights and remedies of the Lenders under the Credit Agreement or any other
Loan Document, and shall not alter, modify, amend or in any way affect any of
the terms, conditions, obligations, covenants or agreements contained in the
Credit Agreement or any other Loan Document, all of which are ratified and
affirmed in all respects and shall continue in full force and effect.
Nothing herein shall be deemed to entitle the Borrower to a consent to, or a
waiver, amendment, modification or other change of, any of the terms,
conditions, obligations, covenants or agreements contained in this Credit
Agreement or any other Loan
<PAGE>
Document in similar or different circumstances. This Amendment shall apply and
be effective only with respect to the provisions of the Credit Agreement
specifically referred to herein.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed by their respective authorized officers as of the day and year
first above written.
ARM FINANCIAL GROUP, INC.,
by /s/ Peter S. Resnik
------------------------
Name: /s/ Peter s. Resnik
Title: Treasurer
by /s/ Edward L. Zeman
------------------------
Name: Edward L. Zeman
Title: C F C
THE CHASE MANHATTAN BANK,
individually, and as
Administrative Agent,
by /s/ Peter F. Plattin
------------------------
Name: Peter F. Plattin
Title: Vice President
BANK OF TOKYO-MITSUBISHI TRUST
COMPANY,
by
------------------------
Name:
Title:
DEUTSCHE BANK AG, NEW YORK
AND/OR CAYMAN ISLAND BRANCHES,
by
------------------------
Name:
Title:
by
------------------------
Name:
Title:
<PAGE>
DRESDNER BANK AG, NEW YORK BRANCH
AND GRAND CAYMAN BRANCH,
by /s/ Rajiv Gupta
------------------------
Name: RAJIV GUPTA
Title: ASSOCIATE
by /s/ Anthony C. Valencourt
---------------------------
Name: ANTHONY C. VALENCOURT
Title: SENIOR VICE PRESIDENT
THE FIRST NATIONAL BANK OF
CHICAGO,
by /s/ Peter L. Crawford
------------------------
Name: Peter L. Crawford
Title: First Vice President
FIRST UNION NATIONAL BANK,
by /s/ T. L. Stichberry
------------------------
Name: T. L. Stichberry
Title: S V P
PNC BANK, N.A.,
by
------------------------
Name:
Title:
SUNTRUST BANK, CENTRAL FLORIDA,
NATIONAL ASSOCIATION,
by
------------------------
Name:
Title:
<PAGE>
INVESTMENT MANAGEMENT AGREEMENT
This INVESTMENT MANAGEMENT AGREEMENT (as amended, supplemented or
otherwise modified and in effect from time to time, this "AGREEMENT"), dated
as of the 15th day of September, 1998, is made by and among 212 CERTIFICATE
COMPANY, a Delaware corporation (the "ISSUER"), INTEGRITY CAPITAL ADVISORS,
INC., a Delaware corporation (the "PORTFOLIO MANAGER"), and THE CHASE
MANHATTAN BANK, a New York banking corporation, as Funding Agent (in such
capacity, the "FUNDING AGENT") for the benefit of the Certificateholders.
WHEREAS,
A. Pursuant to the Face-Amount Certificate Agreement, the
Purchaser, acting through the Funding Agent, has acquired the Face-Amount
Certificate for the benefit of the Certificateholders.
B. The proceeds of the sale of the Face-Amount Certificate will
be deposited by the Funding Agent, at the direction of the issuer, into the
Custodial Account in order to maintain such proceeds as security for the
Face-Amount Certificate by investing in a pool of fixed-income securities
which will be actively managed pursuant to the Investment Guidelines.
C. The Issuer desires to appoint the Portfolio Manager to manage
the Portfolio, and has directed the Custodian to respond to the investment
instructions of the Portfolio Manager.
NOW, THEREFORE, for good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the Issuer, the Portfolio
Manager and the Funding Agent do hereby agree as follows:
1. DEFINITIONS. Each capitalized term used herein and not
otherwise defined herein shall have the meaning given to such term in Annex X
to that certain Face-Amount Certificate Agreement, dated as of September 15,
1998 (the "FACE-AMOUNT CERTIFICATE AGREEMENT", by and between the Issuer, the
Funding Agent and Park Avenue Receivables Corporation, as the same may from
time to time be amended, supplemented or otherwise modified and in effect,
which Annex X is hereby incorporated by reference herein.
<PAGE>
2. APPOINTMENT AND AUTHORITY OF THE PORTFOLIO MANAGER.
(a) APPOINTMENT. The issuer hereby appoints the Portfolio Manager,
the Funding Agent hereby acknowledges and consents to such appointment, and
the Portfolio Manager hereby accepts its appointment, as the exclusive
investment manager with respect to the Portfolio. The Portfolio Manager shall
at all times manage the Portfolio in accordance with the Investment
Guidelines. Except as provided in Section 4 hereof, the Issuer represents and
warrants that it has appointed no other investment advisor or manager with
respect to the Portfolio. The Issuer agrees to provide (or to direct the
Custodian to provide) the Portfolio Manager with such additional information
as may be requested by the Portfolio Manager from time to time to assist it
in managing the Portfolio. The Portfolio Manager's appointment under this
Agreement shall remain in effect until changed or terminated by the Issuer
and/or the Funding Agent as provided herein.
(b) ACQUISITION OF SECURITIES. Except as otherwise provided
herein, the Portfolio Manager is authorized, on behalf of the Issuer, to
subscribe for and purchase Securities of issuers offered to the Issuer from
time to time. The Issuer represents and warrants to the Portfolio Manager
that at the same time of any such purchase it will be an "accredited
investor" as such term is defined in Regulation D under the Securities Act
and a "qualified institutional buyer" as that term is defined in Rule 144A
and that the Issuer shall promptly inform the Portfolio Manager and the
Funding Agent in writing should its status as such change in the future. In
connection with any purchase of Securities eligible for purchase hereunder
and deemed acceptable by the Portfolio Manager in accordance with the terms
hereof, the Issuer authorizes the Portfolio Manager to:
(i) commit to purchase such Securities for the account of the
Issuer on the terms and conditions under which Securities are offered
and are deemed acceptable to the Portfolio Manager in accordance with
the terms hereof; and
(ii) on behalf of the Issuer, execute such agreements,
instruments and documents, and make such commitments, as may be required
by the issuer and/or the seller of such securities, including, but not
limited to, a representations that the Issuer is an "accredited investor"
and/or a "qualified institutional buyer", and a commitment that such
securities will not be offered or sold by the Issuer except in
compliance with the registration requirements
2
<PAGE>
of the Securities Act or an exemption therefrom, if so required in
connection with the acquisition thereof.
The Issuer understands and agrees to be bound by the terms of any commitment
entered into in connection with the purchase of securities on behalf of the
Issuer pursuant to the authority granted to the Portfolio Manager by this
Agreement, notwithstanding a subsequent termination of this Agreement as
provided herein. Notwithstanding the foregoing, the Portfolio Manager shall
not under any circumstances make any commitment on behalf of the Issuer to
acquire or make payment under any Security in excess of the Issuer's ability
to pay such committed amounts from time to time.
(c) GENERAL DUTIES. In addition, and not in limitation of, any
other obligations of the Portfolio Manager, the duties and responsibilities
of the Portfolio Manager shall include the following:
(i) monitoring and enforcing on behalf of the Issuer compliance
with the terms of the Issuer's Securities by the Obligors thereunder,
and monitoring compliance with the terms of the Swap Agreement by the
Swap Provider thereunder;
(ii) recording, accounting for and enforcing payments of amounts
distributable or payable to the Issuer in connection with each of the
Swap Agreement and any Security or Short-Term Investment acquired or
held on behalf and for the account of the Issuer, and arranging for
payments on the Swap Agreement from the Swap Provider and on Securities
to be collected from the Obligors in respect thereof on behalf of and
for the account of the Issuer in accordance with the terms of the
Transaction Documents;
(iii) on the request of the Issuer, arranging for the sale or
other divestment of any Security in accordance with this Agreement and
the other Transaction Documents or for the termination, cancellation,
offsetting or assignment of the Swap Agreement;
(iv) holding, maintaining and preserving records with respect to
acquisitions of, or investments in, sales or divestitures of, and
distributions and payments in connection with, Securities and Short-Term
Investments and with respect to the Swap Agreement; and
3
<PAGE>
(v) taking such other steps as may be necessary or appropriate to
enable the Issuer to perform its duties or exercise its rights under or
in connection with any Security, any Short-Term Investments or the Swap
Agreement.
(d) CALCULATIONS: NOTICE. The Portfolio Manager shall make all
calculations and determinations (which calculations and determinations shall
be conclusive and binding absent manifest error) and give all notices or
other information required of it or the Issuer under any Transaction Document
to which it and/or the Issuer is a party.
(e) BOOKS: RECORDS. The Portfolio Manager shall maintain proper
books of account and complete records of all transactions undertaken or
performed by it and shall render statements or copies thereof to the Issuer,
prepare the tax returns of the Issuer and shall cooperate in all audits of
the Issuer (including any audits required by the Funding Agent or the
Certificateholders under the Face-Amount Certificate Agreement).
(f) CASE MANAGEMENT; The Portfolio Manager shall direct any
acquisition and sale of Securities and Short-Term Investments under the
custodial Agreement such that the Issuer has, or is likely to have,
available funds to pay any costs, fees, expenses, taxes and other amounts due
under the Transaction Documents when due.
(g) DIRECTION BY THE ISSUER: CONFORMITY WITH LAW AND COVENANTS.
Notwithstanding anything herein to the contrary, the Portfolio Manager shall
perform its duties hereunder subject to the direction of the Issuer and in a
manner consistent with the Issuer's Certificate of Incorporation and Bylaws,
with any applicable resolutions of the board of directors of the Issuer in
effect from time to time and in accordance with the terms of the Transaction
Documents, with respect to which, in each case, the Portfolio Manager has
received a copy. The Portfolio Manager will not, in performing its
obligations hereunder, (a) take any action that would cause the Issuer to be
in violation of (i) any law, rule or regulations applicable to it (ii) any
provision of the Certificate of Incorporation or Bylaws of the Issuer or
(iii) any provision of any of the Transaction Documents, (b) take any action
that would cause the Issuer to become subject to registration as an
"investment company" under the Investment Company Act, (c) cause the Issuer
to violate any of the Transaction Documents, or (d) cause the issuer to incur
any obligation or to become bound by
4
<PAGE>
any agreement which, in the reasonable judgment of the Portfolio Manager, the
Issuer would not reasonably be able to satisfy or perform.
(h) ATTORNEY-IN-FACT; LIMITATIONS ON AUTHORITY OF THE PORTFOLIO
MANAGER AS ATTORNEY-IN FACT; AUTHORITY WITH RESPECT TO BANK ACCOUNTS; NATURE
OF SERVICES. (i) Subject to clause (ii) of this clause (h), the Issuer
hereby irrevocably appoints the Portfolio Manager as the Issuer's
attorney-in-fact, with full authority in the place and stead of the Issuer
and in the name of the Issuer or otherwise, from time to time in the
Portfolio Manager's discretion, but subject to the direction of the Issuer,
to take such actions on behalf of the Issuer as may be necessary or advisable
for purposes of the administration and management of the operations of the
Issuer, and the right to ask, demand, collect, sue for, recover, compound,
receive and give acquittance and receipts for moneys due and to become due in
connection therewith and to receive, endorse, and collect any drafts or other
instruments, documents and chattel paper in connection therewith, and to file
any claims or take any action or institute any proceedings which may be
necessary or desirable for the collection thereof or to enforce compliance
with the terms and conditions of any of such documents, instruments and
agreements.
(ii) Anything in clause (i) of this clause (h) or elsewhere in
this Agreement to the contrary notwithstanding, the Portfolio Manager is
not hereby authorized to execute on behalf of or as attorney-in-fact for
the Issuer any Transaction Document, or any amendment, modification or
waiver to or under any Transaction Document.
(iii) The Issuer authorizes the Portfolio Manager to transfer and
deposit funds of the Issuer to and in such bank accounts including,
without limitation, the Custodial Account, as may be established in the
name of the Issuer.
3. CUSTODY. All transactions with respect to assets in the
Portfolio shall be carried out through the Custodian or such other
custodian(s) as the Issuer and the Funding Agent, for the benefit of the
Certificateholders, shall jointly appoint and inform the Portfolio Manager of
in writing. The Issuer shall be solely responsible for paying all fees or
charges of the Custodian and the Portfolio Manager, and neither the Funding
Agent nor any Certificateholder shall have any responsibilities or
liabilities with respect to custody arrangements made by the Issuer, or with
respect to any act, decision or other conduct of any custodian or of any
other person or entity having possession of the Issuer's funds or other
assets. The Issuer authorizes the
5
<PAGE>
Portfolio Manager to give the Custodian instructions (and directs the
Custodian to follow any such instructions when given) for the purchase, sale,
conversion, redemption, exchange, retention or other transactions relating to
any security, cash or cash equivalent or other investment for the Portfolio.
The Issuer also authorizes the Portfolio Manager to instruct the Custodian
(and directs the Custodian to follow any such instructions when given) to
provide the Portfolio Manager with copies of all periodic statements and
other reports relating to the Portfolio, including, without limitation, any
reports that the Custodian typically sends to the Issuer (with copies to the
Funding Agent).
4. DELEGATION; APPOINTMENT OF ARM CAPITAL; CONFLICTS OF INTEREST.
(a) The Portfolio Manager shall be permitted to perform its services
hereunder through any of its officers, ARM Capital or through any other
agents selected by it; PROVIDED that any such other agents shall be approved
in writing by the Funding Agent, for the benefit of the Certificateholders,
from time to time. The Funding Agent, for the benefit of the
Certificateholders, hereby consents to the appointment of ARM Capital as
exclusive investment sub-Portfolio Manager to the Portfolio pursuant to
the terms of that certain Investment Services Agreement between the Portfolio
Manager and ARM Capital dated as of April 24, 1998, a copy of which is
attached hereto as Exhibit B. Notwithstanding any such delegation of its
obligations hereunder by the Portfolio Manager, the Portfolio Manager's
rights and obligations under this Agreement shall remain unchanged, and the
Portfolio Manager shall remain solely responsible for the performance of its
obligations hereunder. The services of the Portfolio Manager to the Issuer
under this Agreement are not to be deemed exclusive, and the Portfolio
Manager shall be free to render similar services to others.
(b) The Portfolio Manager shall not direct the Custodian to
acquire a security to be included in the Portfolio from the Portfolio Manager
or any of its affiliates as principal or to sell an obligation to the
Portfolio Manager or any of its affiliates as principal.
5. PRIORITY OF PAYMENTS
(a) DAILY ALLOCATION OF CASHFLOW. On each Business Day, the
Portfolio Manager shall apply, or instruct the Custodian in writing to apply,
Cashflow received on the immediately preceding Business Day in the following
order of priority:
6
<PAGE>
(1) FIRST, to the extent that any amounts payable under
clauses (1) through (4) and (9) of clause (b) below remain unpaid or
to the extent that any swap payments (other than payments due and
owing under the Swap Agreement) are due and owing by the Issuer with
respect to any Settlement Date prior to such Business Day, such
Cashflow shall be paid to the persons or entities entitled thereto in
the order of priority set forth in clauses (1) through (4) and (9)
of clause (b) below or to any swap counterparties (other than
Integrity Life); and
(2) SECOND, all remaining Cashflow shall be retained in the
Custodial Account and, at the election of the Portfolio Manager, be
applied to the purchase of Eligible Securities or Short-Term
Investments to the extent permitted by and in accordance with the
terms of this Agreement, the Face-Amount Certificate Agreement and the
other Transaction Documents, unless such Business Day is a Settlement
Date, in which case such Cashflow shall be applied in accordance with
clause (b) below; PROVIDED, HOWEVER, that if such Business Day occurs
after the occurrence of (i) an Amortization Event or (ii) the 270th
day following the commencement of the Amortization Period, then upon
the written request of the Funding Agent, all remaining Cashflow shall
be applied as if such Business Day is a Settlement date in accordance
with the terms of clause (b) below.
(b) ALLOCATION OF PAYMENTS ON SETTLEMENT DATES. On each
Settlement Date after application of Cashflow pursuant to clause (a) above,
the Portfolio Manager shall apply, or instruct the Custodian in writing to
apply, all free cash balances or other available cash in the Custodial Account
in the following order of priority:
(1) to the Issuer, for application by the Issuer against the
payment of accrued and unpaid franchise taxes payable by the Issuer;
(2) If Integrity Capital, the Parent or an affiliate thereof
is no longer the Portfolio Manager hereunder, to the Portfolio
Manager in payment of the accrued and unpaid Portfolio Manager Fee
due on such Settlement Date or any prior Settlement Date;
7
<PAGE>
(3) to the Custodian, for the payment of accrued and unpaid
fees and expenses payable under the Custodial Agreement;
(4) to the Funding Agent, for distribution to or for the
account of the Certificateholders for the payment of the accrued and
unpaid Certificate Yield due on such Settlement date or any prior
Settlement Date;
(5) if such Settlement Date shall occur during the
Amortization Period or following the Funding Agent's receipt of a
Partial Amortization Notice, to the Funding Agent, for distribution
to or for the account of the Certificateholders for the repayment of
the Invested Amount with respect to the Face-Amount Certificate
until, in the case of the Amortization Period the invested Amount is
repaid in full, and in the case of such period following the receipt
of a Partial Amortization Notice, the Invested Amount is reduced by
the amount indicated on the applicable Partial Amortization Notice;
(6) to the Funding Agent, for distribution to or for the
account of the Certificateholders with respect to the payment of any
other accrued and unpaid fees, expenses, indemnities, reimbursements
and other amounts (other than principal) not paid pursuant to clause
(4) above and payable to any Certificateholder under the Face-Amount
Certificate Agreement or the Face-Amount Certificate;
(7) to the payment of any other accrued and unpaid
out-of-pocket operating expenses of the Issuer (including, but not
limited to, a management fee equal to the product of (i) 0.075% per
annum times (ii) the average daily outstanding Invested Amount
during the most recently ended Settlement Period);
(8) to the Portfolio Manager in payment of accrued and unpaid
Portfolio Manager Fee due on such Settlement Date or any prior
Settlement Date, but only to the extent not paid in full after
application of all available cash in the Custodial Account on such
Settlement Date as specified above in this clause (b) (and on each
previous Settlement Date);
8
<PAGE>
(9) if no Swap Event has occurred and is continuing,
on a PRO RATA basis, to the Swap Provider, in payment of accrued
and unpaid amounts owing by the Issuer under the Swap Agreement; and
(10) if on such Settlement Date, the Surplus Amount
following the application of funds as provided herein is greater
than zero, then at the election of the Issuer, an amount not
greater than the the Surplus Amount may be withdrawn from the
Custodial Account (to the extent of immediately available funds in
cash) and deposited in such account as the Issuer may direct and
any remaining available cash in the Custodial Account following
such withdrawal shall be retained therein.
6. REPRESENTATIONS AND WARRANTIES OF THE PORTFOLIO MANAGER. The
Portfolio Manager hereby represents and warrants that:
(a) ORGANIZATION AND GOOD STANDING. The Portfolio Manager is a
corporation duly organized, validly existing and in good standing under the
applicable laws of the jurisdiction of its incorporation and has full
corporate power and authority to own its properties and conduct its business
as such properties are presently owned and as such business is presently
conducted and as is proposed to be conducted under this Agreement and the
other Transaction Documents to which it is a party, and to execute, deliver
and perform its obligations under this Agreement and such other Transaction
Documents.
(b) DUE QUALIFICATION. The Portfolio Manager is duly qualified to
do business and is in good standing as a foreign corporation or enterprise
(or is exempt from such requirements), and has obtained all necessary
licenses and approvals, in each jurisdiction in which the investment,
management and servicing of the Securities in accordance with the terms of
this Agreement and the other Transaction Documents requires such
qualification.
(c) DUE AUTHORIZATION. The Portfolio Manager's execution, delivery
and performance of this Agreement and the other Transaction Documents to
which it is a party and the other agreements and instruments executed by the
Portfolio Manager as contemplated hereby and thereby have been duly
authorized by all necessary corporate action on the part of the Portfolio
Manager.
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(d) ENFORCEABILITY. This Agreement and each other Transaction
Document to which the Portfolio Manager is a party constitutes a legal, valid
and binding obligation of the Portfolio Manager enforceable against it in
accordance with its terms except as such enforceability may be limited by
applicable bankruptcy, reorganization, insolvency, moratorium or other
similar laws now and hereafter in effect affecting creditors' rights
generally, and except as such enforceability may be limited by general
principles of equity (whether considered in a suit at law or in equity).
(e) NO CONFLICT. The Portfolio Manager's execution and delivery of
this Agreement and the other Transaction Documents to which it is a party,
and performance of its obligations hereunder and thereunder do not (i)
conflict with or violate in any material respect any law, rule or regulation
applicable to the Portfolio Manager, or (ii) conflict with, result in any
breach of any of the terms and provisions of, or constitute (with or without
notice or lapse of time or both) a default under, any material indenture,
contract, agreement, mortgage, deed of trust or other instrument to which the
Portfolio Manager is a party or by which it or its properties are bound in
any manner which, in either case, would have a material adverse effect on the
Portfolio Manager's financial condition or operations or the Pledged
Collateral or the Portfolio Manager's ability to perform its obligations
hereunder or under any other Transaction Document.
(f) NO PROCEEDINGS. There are no proceedings or investigations
pending or, to the best knowledge of the Portfolio Manager, threatened
against it before any governmental agency (i) asserting the illegality,
invalidity or unenforceability or seeking any determination or ruling that
would affect the legality, binding effect, validity or enforceability, of
this Agreement or any other Transaction Document, or (ii) seeking to prevent
the consummation of any of the transactions contemplated by this Agreement or
any other Transaction Document, or (iii) seeking any determination or ruling
that is likely to have a material and adverse effect on the performance by
the Portfolio Manager of its obligations under this Agreement or any other
Transaction Document to which it is a party.
(g) CONSENTS. No authorization, consent, license, order or approval
of or registration or declaration with any governmental agency or other
person or entity is required to be obtained, effected or given by the
Portfolio Manager in connection with the execution and delivery of this
Agreement by such Portfolio Manager or the performance of its obligations
hereunder or any other Transaction Document to which it is a party.
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(h) AMORTIZATION EVENT. To the best of its knowledge, no
Amortization Event has occurred or is continuing.
(i) YEAR 2000 COMPLIANCE. The Portfolio Manager has reviewed and
assessed all computer applications which are material to the Portfolio
Manager's, and its affiliates performing any of its duties hereunder,
businesses with respect to the ability of such applications to correctly
recognize references to, and abbreviations of, the year 2000 and after
(including, without limitation, references to "00" as the year 2000 and not
the year 1900). The Portfolio Manager reasonably believes, as a result of
such reviews, assessments and inquiries, that to the extent one or more of
such computer applications of the Portfolio Manager or its affiliates
performing any of its duties hereunder is unable to correctly recognize such
references to, or abbreviations of, the year 2000 and after, that such
deficiencies would not materially and adversely affect its ability to perform
its obligations hereunder or under any other Transaction Document.
(j) INVESTMENT ADVISERS ACT; ERISA. The Portfolio Manager is a
registered investment adviser under the Investment Advisers Act of 1940, as
amended and, to the extent necessary to comply with the terms of the United
States Department of Labor Prohibited Transaction Exemption 84-14 relating to
transactions negotiated by qualified professional asset managers on behalf of
employee benefit plans subject to Title I of ERISA, or Section 4975 of the
Code, the Portfolio Manager is a fiduciary with respect to each such plan
solely with respect to those assets of the Issuer that are treated as assets
of such plan for purposes of Title I of ERISA or Section 4975 of the Code.
The representations and warranties set forth in this Section 6(i)
shall survive the issuance of the Face-Amount Certificate (ii) any liability
of the Portfolio Manager in respect of such representations and warranties as
and when made shall cease and be of no effect only upon repayment in full of
the Face-Amount Certificate and all the other obligations of the Issuer under
the Face-Amount Certificate Agreement and the other Transaction Documents and
(iii) shall be deemed to be reaffirmed on each Business Day on which (A)
Securities are purchased or sold by the Issuer and (B) the Issuer receives
funds from the Certificateholders pursuant to the Face-Amount Certificate.
Upon a discovery by the Issuer, the Portfolio Manager or the Funding Agent,
for the benefit of the Certificateholders, of a breach of any of the
foregoing representations and warranties, the party discovering such breach
shall give prompt written notice to the other parties.
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7. COVENANTS OF THE PORTFOLIO MANAGER. The Portfolio Manager hereby
covenants that, until the Termination Date:
(a) PRESERVATION OF EXISTENCE. The Portfolio Manager will preserve
and maintain its existence, rights, franchises and privileges in the
jurisdiction of its formation, and qualify and remain qualified in good
standing as a foreign enterprise in each jurisdiction where the failure to
maintain such qualification would materially and adversely affect (i) the
collectibility of the Securities or (ii) the ability of the Portfolio Manager
to perform its obligations hereunder.
(b) COLLECTIONS; CUSTODIAL ACCOUNT. On each Business Day that the
Portfolio Manager receives any collections, payments or other amounts
required pursuant to the terms of any Transaction Document to be deposited in
the Custodial Account, the Portfolio Manager agrees to hold all such
collections, payments and other amounts in trust and to deposit such
collections, payments and other amounts, in kind and in the form received,
to the Custodial Account as soon as practicable, but in no event later than
the next succeeding Business Day.
(c) REQUIREMENTS OF LAW. The Portfolio Manager will maintain in
effect all licenses, qualifications and franchises required under law or
regulation in order to direct the investment in, manage and service each
Security and will comply in all material respects with all other laws or
regulations in connection with investing in, managing and servicing each
Security, in each case except where the failure to perform such obligations
or maintain such qualifications would not be likely to have a material and
adverse effect on (i) the collectibility of any Security or (ii) the ability
of the Portfolio Manager to perform its obligations hereunder or under any
other Transaction Document.
(d) DEFAULTED SECURITIES. Upon the Portfolio Manager becoming aware
that any Security is no longer an Eligible Security hereunder, the Portfolio
Manager shall within 30 days of such date, sell, assign or otherwise transfer
the Issuer's interest in such Security in accordance with its customary
procedures for the sale of such Securities.
(e) PROTECTION OF FUNDING AGENT'S RIGHTS. The Portfolio Manager
will take no action pursuant hereto which would materially impair the rights
of the Issuer or the Funding Agent, for the benefit of the
Certificateholders, in any Security or other Pledged Collateral. The
Portfolio Manager shall, on behalf of the Issuer prosecute and/or defend all
claims, suits and causes of actions which arise for or
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against the Issuer in connection with its (or the Portfolio Manager's)
performance of its obligations under this Agreement.
(f) REPORTING REQUIREMENTS. The Portfolio Manager will furnish,
or will cause to have furnished, to the Issuer and the Funding Agent:
(i) within one (1) Business Day after its knowledge
(or after it reasonably should have known) of the occurrence
of any Amortization Event, notification of such occurrence;
(ii) as promptly as possible, but in no event later
than the fifth(5th) Business Day after its receipt thereof,
copies of any documents relating to any litigation, claim,
counterclaim or proceeding commenced against the Issuer, the
Portfolio Manager or the Swap Provider which could have a
material adverse effect on (i) the financial condition,
business or operations of the Issuer, the Portfolio Manager
or the Swap Provider, (ii) the ability of each of the
Issuer, the Portfolio Manager or the Swap Provider to
perform its respective obligations under any Transaction
Document, (iii) the legality, validity or enforceability of
this Agreement or any other Transaction Document, or (iv)
the Issuer's interest in the Pledged Collateral, or (v) the
collectibility of the Pledged Collateral generally or of any
material portion of the Pledged Collateral;
(iii) as soon as practicable and in any event within 60
days after the end of each first three fiscal quarters of
each fiscal year of the Issuer, a balance sheet of the
Issuer as of the end of such quarter, and the related
revenue and expense statements for the period commencing at
the end of the previous fiscal year and ending with the end
of such quarter, all of the foregoing to be certified by an
officer of the Portfolio Manager and prepared in accordance
with generally accepted accounting principles;
(iv) as soon as practicable and in any event within 120
days after the end of each fiscal year of the Issuer and the
Parent, the audited financial statements of the Parent which
include the Parent's consolidated subsidiaries (including,
without limitation, the Issuer, prepared in accordance with
generally accepted accounting principles
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by certified public accountants of national standing
reasonably satisfactory to the Funding Agent;
(v) on the third Business Day of each calendar week, a
"Weekly Report" with respect to the Portfolio as of the last
Business Day of the preceding calendar week substantially in
the form attached hereto as Exhibit C, which report shall
include a calculation of the Shortfall Amount, if any, as of
such date;
(vi) not less than two (2) Business Days prior to each
Settlement Date, a "Settlement Report" with respect to the
Portfolio for the most recently ended calendar month
substantially in the form attached hereto as Exhibit D,
which report shall include a calculation of the Shortfall
Amount, if any, as of the last Business Day of such calendar
month;
(vii) on each Settlement Date, (A) a "Monthly Compliance
Report" with respect to the Portfolio for the most recently
ended calendar month substantially in the form attached
hereto as Exhibit E, which report shall demonstrate the
Issuer's and the Portfolio Manager's compliance with the
Investment Guidelines and certain other restrictions set
forth herein, as of the last Business Day of such calendar
month;
(viii) within three (3) Business Days after the placement
on watchlist for a downgrade, or within one (1) Business Day
following the withdrawal or reduction of the ratings of any
claims paying ability or debt obligations of any of the
Parent or any of its affiliates, notice of such placement on
the watchlist, withdrawal or reduction;
(ix) on each Business Day following the occurrence of
an Amortization Event specified in clause (xi) of the
definition thereof, a report certifying as to the Fair
Market Value of all Securities and Short-Term Investments
owned by the Issuer as of the close of business on the
immediately preceding Business Day; and
(x) promptly, from time to time, such other
information, documents, records or reports respecting the
Pledged Collateral or the condition or operations, financial
or otherwise, of the issuer or the
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Portfolio Manager and its affiliates performing services
hereunder as the Funding Agent, for the benefit of the
Certificateholders, may reasonably request.
Without limiting the obligations of the Portfolio Manager and the Issuer
under clause (j) below, the Portfolio Manager shall provide to the Funding
Agent access to the documentation in its possession or under its control
regarding the Securities and other Pledged Collateral serviced by it under or
pursuant to this Agreement.
(g) COMPLIANCE WITH INVESTMENT GUIDELINES. The Portfolio Manager
will comply with and perform its obligations in all material respects with
respect to the Investment Guidelines in accordance with terms thereof,
(h) ACQUISITION OF SECURITIES. The Portfolio Manager shall not
arrange for the Issuer to acquire any Security, and the Issuer shall not
enter into, or become bound to acquire any Security (i) during the
Amortization Period or (ii) if such Security does not constitute an Eligible
Security or a Short-Term Investment.
(i) OTHER AGREEMENTS. the Portfolio Manager (acting on the
Issuer's behalf) will, subject to compliance with all applicable laws and
regulations and the terms of this Agreement and the other Transaction
Documents, enforce the Issuer's rights under each Security in accordance with
its respective terms, and make to any Obligor such reasonable demands and
requests for information and reports or for action as the Issuer is entitled
to make thereunder.
(j) DELIVERY OF PLEDGED COLLATERAL. The Portfolio Manager shall
instruct the appropriate persons or entities to deliver each physical
instrument, chattel paper or certificated security evidencing any Pledged
Collateral (other than the Swap Agreement which, pursuant to the Pledge
Agreement, have been delivered, or will be delivered, to the Funding Agent)
to the Custodian immediately upon the acquisition of the related Security,
but in no case later than five (5) Business Days after the receipt thereof.
(k) PAYMENT INSTRUCTIONS. The Portfolio Manager (on behalf of the
Issuer) will instruct (or cause to be instructed) all Obligors and the Swap
Provider to make all payments with respect to the Pledged Collateral directly
to the Custodial Account.
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(l) REPORTING. Each Weekly Report and Monthly Compliance Report, and
each other report or certification, delivered by the Portfolio Manager
pursuant to this Agreement shall be true and correct in all material respects
as of the date of such report or certificate.
(m) MARKING OF RECORDS. The Portfolio Manager shall either indicate in
its computer records or otherwise segregate the records related to any
Securities, Short-Term Investments or other Pledged Collateral in its
possession and mark the files containing the same with a legend substantially
to the effect that a security interest in the Securities and other Pledged
Collateral has been granted to the Funding Agent for the benefit of the
Certificateholders pursuant to the Pledge Agreement.
8. EXECUTION OF TRANSACTIONS. The Portfolio Manager shall arrange for
the execution of securities transactions for Issuer through brokers or
dealers that the Portfolio Manager reasonably believes will provide the best
execution. In selecting a broker or dealer, the Portfolio Manager may
consider, among other things, the broker or dealer's execution capabilities,
financial circumstances, reputation, access to the market for the securities
being traded, as well as the experience and skill of the firm's securities
traders. The Portfolio Manager will make all commercially reasonable efforts
to secure the best available price and execution for the Issuer. The
Portfolio Manager shall not be responsible for any acts or omissions by any
broker(s) or dealer(s) selected by the Portfolio Manager; PROVIDED that the
Portfolio Manager is not negligent in the selection of such broker(s) or
dealer(s). Transactions for each of the Portfolio Manager's other accounts
will be effected independently of those related to the Portfolio, unless the
Portfolio Manager decides to purchase or sell the same securities for several
persons or entities at approximately the same time. Nonetheless, the
Portfolio Manager may (but is not obligated to) combine such orders to take
advantage of economies of scale and/or to provide better execution. The
Issuer authorizes the Portfolio Manager to instruct all brokers and/or
dealers executing orders for the Issuer's account to forward duplicate
confirmations of those transactions to the Portfolio Manager and the
Custodian at such place and in such manner as may be designated from time to
time by the Portfolio Manager or the Custodian (and directs any such brokers
and/or dealers to follow such instructions when given), and the Issuer shall
provide to the Portfolio Manager such evidence as the Portfolio Manager may
require to confirm its authority to act on behalf of the Issuer with respect
to investment or reinvestment of the Portfolio. Copies of any such
confirmations shall be forwarded by the Portfolio Manager to the Custodian
promptly after receipt thereof.
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9. ALLOCATION OF INVESTMENT OPPORTUNITIES. The Issuer understands and
agrees that the Portfolio Manager performs investment management services for
various persons and entities and may take action with respect to any of such
persons or entities which may differ from any actions taken (or from the
timing of nature of actions taken) with respect to, or on behalf of, the
Issuer. The Portfolio Manager shall not be obligated to purchase or sell for
the Issuer securities which the Portfolio Manager may purchase or sell for
itself or for the portfolios of other persons and entities if the Portfolio
Manager, in its sole discretion, deems that such investment or transaction
appears unsuitable, impractical, improper, ill-advised, or undesirable for
the Issuer.
10. INVESTMENT INFORMATION. The Portfolio Manager and any Affiliated
Person may from time to time come into possession of material, non-public or
other confidential information that, if disclosed, might affect an investor's
decision to buy, sell or hold a Security. Under applicable law, the
Affiliated Persons cannot improperly disclose or use this information for
their personal benefit or for the benefit of any person or entity, including
the Portfolio Manager's other customers. If any Affiliated Person obtains
non-public or other confidential material information about any issuer, the
Issuer and the Funding Agent acknowledges and agrees that such Affiliated
Person will have no obligation to disclose the information to the Issuer or
the Funding Agent or use it for the Issuer or the Funding Agent's benefit.
11. LIABILITY AND INDEMNIFICATION. (a) The Portfolio Manager cannot and
does not guarantee the future performance of the Portfolio, the success of
any investment decision or strategy that the Portfolio Manager may utilize
with respect to the Portfolio, or the success of the Portfolio Manager's
overall management of the Portfolio. The Issuer understands that the
investment decisions made by the Portfolio Manager with respect to the
Portfolio are potentially subject to various market, currency, economic,
political and business risks, and that such investment decisions may not
always be profitable. Except as may otherwise be provided by law, none of the
Affiliated Persons shall be liable to the Issuer or any other party in
connection with, or for: (i) any loss that the Issuer may suffer by reason of
any investment decision made or other action taken or omitted in good faith
by the Portfolio Manager with that degree of care, skill, prudence, and
diligence under the circumstances that a prudent person acting in a similar
capacity would use; (ii) any loss arising from the Portfolio Manager's
adherence to the Issuer's (or, if applicable, the Funding Agent's)
instructions; or (iii) any act or failure to act by the Custodian, any
broker(s) or dealers(s) engaging in transactions for the Issuer or any other
third
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party (other than its delegees appointed in accordance with the terms of
Section 4). The federal and state securities laws impose liabilities under
certain circumstances on persons who act in good faith, and therefore nothing
in this Agreement will waive or limit any rights that the Issuer may have
under those laws.
(b) Notwithstanding anything to the contrary set forth in clause (a)
above, the Portfolio Manager shall indemnify and hold harmless each
Indemnified Party and the Issuer from and against Indemnified Amounts arising
out of or resulting from (i) any breach by the Portfolio Manager of its
representations and warranties made in this Agreement, or otherwise made by
an officer of the Portfolio Manager pursuant to the terms hereof or thereof;
(ii) the failure by the Portfolio Manager to perform any of the duties
specifically undertaken by it under this Agreement; (iii) any lender
liability claim, suit or action or other similar claim or action arising out
of or resulting from any action or omission by the Portfolio Manager with
respect to the Securities or the other Pledged Collateral, (iv) any equitable
subordination claim, suit or action or other similar claim or action arising
out of or resulting from any action or omission by the Portfolio Manager, (v)
any failure by the Portfolio Manager to deliver, or cause the Issuer to
deliver, in accordance with the Pledge Agreement, any instrument, chattel
paper or certificated security evidencing any Pledged Collateral owned by the
Issuer within five (5) Business Days following the acquisition thereof, (vi)
the failure to cause the Issuer to be registered as a "broker" or a "dealer",
if required, within the meaning of the Exchange Act, or (vii) the Portfolio
Manager's gross negligence or willful misconduct, EXCLUDING, HOWEVER, in each
case, (1) Indemnified Amounts to the extent arising out of or resulting from
the willful misconduct or gross negligence by such Indemnified Party or the
Issuer of any of his, her or its obligations and duties or (2) recourse for
uncollectible securities (unless such Securities are uncollectible as a
result of any breach, failure or claim described in clause (i), (ii), (iii),
(iv), (v), or (vi) above) or, (3) indemnification of the Issuer or
Indemnified Party for lost profits or for consequential, special or punitive
damages or (4) any income or franchise taxes (or any interest or penalties
with respect thereto) or other taxes on or measured by the gross or net
income or receipts of such Indemnified Party or the Issuer or any withholding
taxes. The agreements contained in this Section 11(b) shall survive the
Termination Date and the payment of all amounts due under any Transaction
Document.
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12. TERMINATION OR ASSIGNMENT. This Agreement shall be effective
as of the date that the Issuer transfers immediately available funds into the
Custodial Account for management hereunder. It shall remain in full force
and effect until such time that the Issuer's obligations under the
Face-Amount Certificate have been paid in full and control over any remaining
Securities in the Portfolio has been transferred to the Issuer, or any
successor thereto. No assignment (as such term is defined in the Investment
Company Act) of this Agreement shall be made by the Portfolio Manager without
the prior written consent of the other parties to this Agreement or as
otherwise provided in Section 13 below.
13. ASSIGNMENT; RESIGNATION AND REMOVAL OF PORTFOLIO MANAGER.
(a) RESIGNATION OF PORTFOLIO MANAGER. The Portfolio Manager may
at any time resign from the obligations and duties imposed on it hereunder
upon not less than 180 days' written notice to the Funding Agent, the
Custodian and the Issuer. No such resignation shall become effective until
the Funding Agent or a Successor Portfolio Manager shall have assumed the
responsibilities and obligations of the resigning Portfolio Manager in
accordance with this Section 13.
(b) REMOVAL OF PORTFOLIO MANAGER. The Portfolio Manager may be
removed by the Funding Agent, for the benefit of the Certificateholders, upon
the occurrence of (i) a Liquidation Event or (ii) the first anniversary of
the commencement of the Amortization Period. Any notice delivered pursuant
to the preceding sentence is referred to as a "REMOVAL NOTICE". No such
removal shall become effective until the Funding Agent or a Successor
Portfolio Manager shall have assumed the responsibilities and obligations of
the resigning Portfolio Manager in accordance with this Section 13.
(c) SUCCESSOR PORTFOLIO MANAGER. On and after the receipt by the
Portfolio Manager of a Removal Notice pursuant to clause (b) above or upon a
resignation by the Portfolio Manager pursuant to clause (a) above, the
Portfolio Manager shall continue to perform all advisory, servicing and
administrative functions applicable to the Portfolio Manager under this
Agreement and be entitled to receipt of all compensation payable to the
Portfolio Manager until (i) in the case of the receipt of a Removal Notice,
the date specified in such Removal Notice or otherwise specified by the
Funding Agent in writing or, if no such date is specified in such Removal
Notice or otherwise specified by the Funding Agent, until the earlier of a
date agreed upon by the Portfolio Manager and the Funding Agent or a date
specified by the Funding Agent in a written notice to the Portfolio Manager,
and (ii)
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in the case of the resignation of the Portfolio Manager, until the Funding
Agent or a Successor Portfolio Manager shall have assumed the
responsibilities and obligations of the Portfolio Manager pursuant to this
Section 13. The Funding Agent shall as promptly as practicable after the
giving of a Removal Notice or such a resignation appoint another person or
entity (which may be the Funding Agent, at its option, or such other person or
entity as it may appoint) as a successor Portfolio Manager (the "SUCCESSOR
PORTFOLIO MANAGER"). Such Successor Portfolio Manager shall accept its
appointment by a written assumption in a form acceptable to the Funding Agent.
In the event that a Successor Portfolio Manager has not been appointed or has
not accepted its appointment or the applicable consents have not been received
by the Funding Agent by the earlier of 30 days after the date of such Removal
Notice or at the time when the Portfolio Manager ceases to act, the Funding
Agent without further action shall automatically be appointed the Successor
Portfolio Manager. At any time after such appointment, the Funding Agent,
for the benefit of the Certificateholders, may (x) delegate any of its
administrative or other obligations as Successor Portfolio Manager to an
affiliate or agent in accordance with the terms of this Agreement (all
compensation to such affiliate or agent being paid by, and being the sole
responsibility of, the Funding Agent), or (y) resign as Portfolio Manager
upon its appointment of, and the acceptance of such appointment by, a
Successor Portfolio Manager pursuant to the terms hereof. Notwithstanding
the foregoing, the Funding Agent shall, if it is legally unable so to act as
Successor Portfolio Manager, petition a court of competent jurisdiction to
appoint any established institution (other than the Funding Agent) as the
Successor Portfolio Manager hereunder. The Portfolio Manager shall be
entitled to be paid all amounts accrued and unpaid hereunder at the time such
removal or resignation becomes effective pursuant hereto in accordance with
the priorities set forth in Section 5.
(d) PORTFOLIO MANAGERY TRANSFER. After receipt by the Portfolio
Manager of a Removal Notice, and on the date that a Successor Portfolio
Manager shall have accepted its appointment and all related consents shall
have been received by the Funding Agent pursuant to clause (a) above, all
authority and power of the predecessor Portfolio Manager under this Agreement
shall pass to and be vested in such Successor Portfolio Manager (a "PORTFOLIO
MANAGERY TRANSFER"), and thereupon (I) such Successor Portfolio Manager shall
be subject to all the responsibilities, duties and liabilities relating
thereto placed on the Portfolio Manager by the terms and provisions hereof
(excluding any liabilities incurred by the predecessor Portfolio Manager or
which arose from the actions or omissions of the predecessor Portfolio
Manager), (II) all references in this Agreement to the Portfolio Manager
shall be deemed to refer to such Successor Portfolio Manager, and (III) Such
Successor
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Portfolio Manager (including, to the extent applicable, the Funding Agent)
shall be entitled to receive such fees and other compensation to which the
Portfolio Manager is entitled hereunder. The predecessor Portfolio Manager
agrees to cooperate, at its expense, with the Funding Agent and such
Successor Portfolio Manager in (i) effecting the termination of the
responsibilities and rights of the Portfolio Manager hereunder, including,
without limitation, the transfer to such Successor Portfolio Manager of all
authority of the Portfolio Manager to administer the Securities as provided
under this Agreement, including all authority over all Cashflow which shall
on the date of such Portfolio Managery Transfer be held by the Portfolio
Manager for deposit to the Custodial Account, or which have been deposited by
the Portfolio Manager to the Custodial Account, or which shall thereafter be
received with respect to the Securities, and (ii) assisting the Successor
Portfolio Manager until all servicing, management and administrative
activities have been transferred to such Successor Portfolio Manager, such
assistance to include, without limitation, (x) assisting any accountants
selected by the Successor Portfolio Manager to verify collection records and
reports made prior to the Portfolio Managery Transfer and (y) assisting the
Successor Portfolio Manager in making the computer systems of the Portfolio
Manager and the Successor Portfolio Manager compatible to the extent
necessary to effect the Portfolio Managery Transfer. The Portfolio Manager
shall, at its expense, within five Business Days of such Portfolio Managery
Transfer, assemble each of the documents, instruments and other records
(including computer tapes and discs) available to it or in its possession,
which evidence the Securities and the other Pledged Collateral, and which are
necessary or desirable to collect the Securities and the other Pledged
Collateral and shall make the same available to the Successor Portfolio
Manager or the Funding Agent or its designee at a place selected by the
Successor Portfolio Manager and in such form as the Successor Portfolio
Manager or the Funding Agent may reasonably request.
(e) RELEASE. In no event shall the appointment and acceptance of a
Successor Portfolio manager (including the succession of the Funding Agent to
the role of the Portfolio manager pursuant to clause (c) above) release the
predecessor Portfolio Manager from any liabilities (including without
limitation, any indemnification obligation arising under Section 11) incurred
by it or otherwise arising prior to, or arising from acts or omissions on it
part occurring prior to, the effective date of the resignation or removal of
such predecessor Portfolio Manager, or otherwise relating to the basis for
any such removal. Except to the extent arising from a failure to perform its
own obligations under the Transaction Documents, the Funding Agent shall not
be liable for any acts or omission of any Portfolio Manager (including,
without limitation, any Successor Portfolio Manager appointed by the Funding
Agent
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pursuant to this Section 11) other than acts or omissions of the Funding
Agent to the extent acting as Portfolio Manager hereunder.
14. COMPENSATION OF PORTFOLIO MANAGER. The Portfolio Manager shall be
entitled to receive as compensation for services rendered hereunder a fee
equal to the product of (i) 0.25% per annum, times (ii) the average of the
outstanding Invested Amount on the first and last day of the most recently
ended Settlement Period assuming an actual over 360 day year. Such fee shall
be paid in arrears on each Settlement Date with respect to the Settlement
Period most recently ended. The Issuer acknowledges its understanding and
agreement that any amounts invested in Short-Term Investments will be
included in calculating the value of the Portfolio for purposes of computing
the Portfolio Manager's fees as described above, and that such assets may
also be subject to separate advisory and other fees and expenses charged by
such funds which fees and expenses may be additional to any fees charged by
the Portfolio Manager hereunder. Except as (a) set forth above or otherwise
agreed upon by the parties and (b) permissible under applicable law, the
Portfolio Manager shall not be compensated on the basis of a share of the
capital gains on, or the capital appreciation of, the Securities in the
Issuer's account or any portion thereof.
15. ISSUER BROCHURE. The Issuer and the Funding Agent each acknowledge
receipt of the Portfolio Manager's current disclosure brochure, Form ADV Part
II.
16. MISCELLANEOUS.
(a) GOVERNING LAW. This Agreement shall be governed by and construed
and enforced in accordance with the laws of the State of New York.
(b) NOTICES. All communications and notices provided for hereunder
shall be in writing (including bank wire, telecopy or electronic facsimile
transmission or similar writing) and shall be given to the other parties
hereto at their respective addresses or telecopy numbers set forth below. All
such communications and notices shall, when mailed, telecopied, telegraphed,
telexed or cabled, be effective when received through the mails, transmitted
by telecopy, delivered to the telegraph company, confirmed by telex
answerback or delivered to the cable company, respectively.
IF TO THE ISSUER:
22
<PAGE>
212 CERTIFICATE COMPANY
515 West Market Street, 8th Floor
Louisville, Kentucky 40202
Attention: Robert L. Maddox, President
Telephone: (502) 540-2014
Telecopy: (502) 582-7903
IF TO THE PORTFOLIO MANAGER:
INTEGRITY CAPITAL ADVISORS, INC.
515 West Market Street, 8th Floor
Louisville, Kentucky 40202
Attention: Robert L. Maddox
Telephone: (502) 540-2014
Telecopy: (502) 582-7903
IF TO THE FUNDING AGENT OR ANY CERTIFICATEHOLDER:
THE CHASE MANHATTAN BANK
450 West 33rd Street, 15th Floor
New York, New York 10001
Attention: Andrew Taylor
Telephone: (212) 946-7861
Telecopy: (212) 946-7776
IF TO THE CUSTODIAN:
THE CHASE MANHATTAN BANK
450 West 33rd Street, 15th Floor
New York, New York 10001
Attention: Andrew Taylor
Telephone: (212) 946-7861
Telecopy: (212) 946-7776
(c) SEPARABILITY. In case one or more of the provisions contained in
this Agreement shall be found to be invalid, illegal or unenforceable in any
respect, the validity, legality and enforceability of the remaining
provisions contained herein shall not in any way be affected or impaired
thereby.
23
<PAGE>
(d) COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original and all of
which together shall constitute one and the same instrument.
(e) INTEGRATION; AMENDMENT. This Agreement and the other
Transaction Documents referenced to herein is the entire agreement between
the parties hereto and supersedes and replaces any previous discussions or
agreements, written or oral, between the parties hereto. No term or
provision of this Agreement may be amended, supplemented, waived or modified,
except pursuant to an instrument in writing signed by the party or other
person against whom enforcement of such amendment, supplement, waiver or
modification is sought; PROVIDED that, until the Termination Date, no such
amendment, supplement, waiver or modification shall be effective without the
prior written consent of the Funding Agent.
(f) REMEDIES CUMULATIVE; NO WAIVER. No right, power or remedy
granted or reserved herein is intended to be exclusive of any other right,
power or remedy, but each and every such right, power and remedy shall be
cumulative and concurrent and in addition to any other right, remedy or power
hereunder or under law. No delay or omission by either party to exercise any
right, power or remedy in connection with a default shall exhaust or impair
any such right, power or remedy or shall be construed to be a waiver of such
default or acquiescence therein. The Issuer or the Funding Agent's
forbearance in any particular case shall not be a waiver as to action that
may be taken by the Issuer or the Funding Agent with regard to any future
non-compliance.
(g) CONFIDENTIALITY. (i) The Portfolio Manager shall maintain and
shall cause each of its employees and officers to maintain the
confidentiality of this Agreement and the other confidential proprietary
information with respect to the Funding Agent and the Purchaser and their
respective businesses obtained by it or them in connection with the
structuring, negotiating and execution of the transactions contemplated
herein, except that the Portfolio Manager and its officers and employees may
disclose such information to the Portfolio Manager's external accountants and
attorneys and as required by any applicable law or order of any judicial or
administrative proceeding. In addition, the Portfolio Manager may disclose
any such nonpublic information pursuant to any law, rule, regulation,
direction, request or order of any judicial, administrative or regulatory
authority or proceedings (whether or not having the force or effect of law)
and in connection with any publication permitted under Section 14(i) of the
Face-Amount Certificate Agreement.
24
<PAGE>
(ii) Anything herein to the contrary notwithstanding, the Portfolio
Manager hereby consents to the disclosure of any nonpublic information
with respect to it (x) to the Funding Agent or the Certificateholders by
each other, (y) by the Funding Agent or the Certificateholders to any
prospective or actual assignee or participant of any of them or (z) by
the Funding Agent to any rating agency, commercial paper dealer or
provider of a surety, guaranty or credit or liquidity enhancement to the
Purchaser or any entity organized for the purpose of purchasing, or
making loans secured by, financial assets for which the Funding Agent
acts as the administrative agent and to any officers, directors,
employees, outside accountants and attorneys of any of the foregoing,
provided each such Person is informed of the confidential nature of such
information in a manner consistent with the practice of the Funding
Agent for the making of such disclosures generally to persons of such
type. In addition, the Certificateholders and the Funding Agent may
disclose any such nonpublic information pursuant to any law, rule,
regulation, direction, request or order of any judicial, administrative
or regulatory authority or proceedings (whether or not having the force
or effect of law) and to any person or entity in connection with the
enforcement of this Agreement, the other Transaction Documents and the
other documents delivered in connection therewith and in connection with
any restructuring or workout related to the Face-Amount Certificate
Agreement, the Transaction Documents or such other documents following
an Amortization Event.
(h) BANKRUPTCY PETITION. (i) The Portfolio Manager hereby
covenants and agrees that, prior to the date which is one year and one day
after the payment in full of all outstanding senior indebtedness of the
Purchaser, it will not institute against, or join any other person or entity
in instituting against, the Purchaser any bankruptcy, reorganization,
arrangement, insolvency or liquidation proceedings or other similar
proceeding under the laws of the United States or any state of the United
States.
(ii) The Portfolio Manager hereby covenants and agrees that, prior
to the date which is one year and one day after the Termination Date,
it will not institute against, or join any other person or entity in
instituting against, the Issuer any bankruptcy, reorganization,
arrangement, insolvency or liquidation proceedings or other similar
proceeding under the laws of the United States or any state of the
United States.
25
<PAGE>
(i) HEADINGS. The headings and subheadings in the Agreement are
for purposes of reference only and shall not limit or otherwise affect the
meaning hereof.
(j) AUTHORIZATION. Each party hereto represents and warrants that
this Agreement and its execution has been duly authorized by any necessary
and appropriate corporate or other action. In addition, the Issuer shall
inform the Portfolio Manager of any event or occurrence that might affect the
authority or the propriety of this Agreement.
(k) SUBMISSION TO JURISDICTION. Each of the parties hereto hereby
submits to the nonexclusive jurisdiction of the United States District Court
for the Southern District of New York and of any New York state court sitting
in The City of New York for purposes of all legal proceedings arising out of
or relating to this Agreement or the transactions contemplated hereby. Each
of the parties hereto hereby irrevocably waives, to the fullest extent it may
effectively do so, any objection which it may now or hereafter have to the
laying of the venue of any such proceeding brought in such a court and any
claim that any such proceeding brought in such a court has been brought in an
inconvenient forum. Nothing in this Agreement shall affect the right of the
Funding Agent or any Certificateholder to bring any action or proceeding
against the Issuer, the Portfolio Manager or their respective properties in
the courts of other jurisdictions to realize upon the Pledged Collateral or
any other security for the obligations hereunder, or to enforce a judgment or
other court order in favor of the Funding Agent or the Certificateholders.
(l) WAIVER OF JURY TRIAL. Each of the parties hereto hereby
waives any right to have a jury participate in resolving any dispute,
whether sounding in contract, tort or otherwise among any of them arising out
of, connected with, relating to or incidental to the relationship between
them in connection with this Agreement or other Transaction Documents.
(m) SERVICE OF PROCESS. The Issuer and the Portfolio Manager each
hereby appoint CT Corporation located at 1633 Broadway, New York, New York
10019 as the authorized agent upon whom process may be served in any action
arising out of or based upon this Agreement, the other Transaction Documents
to which such Person is a party or the transactions contemplated hereby or
thereby that may be instituted in the United States District Court for the
Southern District of New York and of any New York State court sitting in The
City of New York by the Funding Agent, any Certificateholder or any assignee
of any of them.
26
<PAGE>
(n) FUNDING AGENT. (i) Chase acts as Funding Agent and as
administrative agent for the Purchaser, as issuing and paying agent for the
Purchaser's commercial paper notes, as provider of other backup facilities
for the Purchaser, and may provide other services or facilities from time to
time. Each of the parties hereto hereby acknowledges and consents to any and
all Chase Roles, waives any objections it may have to any actual or
potential conflict of interest caused by Chase's acting as the Funding Agent
or as an APA Bank under the Asset Purchase Agreement and acting as or
maintaining any of the Chase Roles, and agrees that in connection with any
Chase Role (other than an actual conflict of interest arising from Chase's
activities as custodian which has a material adverse effect on the Issuer),
Chase may take, or refrain from taking, any action which it in its discretion
deems appropriate.
(ii) Notwithstanding any provision of this Agreement: (i) the
parties to this Agreement shall not have any obligations under this Agreement
other than those specifically set forth herein, and no implied obligations of
any party hereto shall be read into this Agreement; and (ii) in no event shall
any party hereto be liable under or in connection with this Agreement for
indirect, special, or consequential losses or damages of any kind, including
lost profits, even if advised of the possibility thereof and regardless of
the form of action by which such losses or damages may be claimed. No party
to this Agreement, nor any of its directors, officers, agents or employees
shall be liable for any action taken or omitted to be taken in good faith by
it or them under or in connection with this Agreement, except for its or
their own gross negligence or willful misconduct. Without limiting the
foregoing, the Funding Agent (a) may consult with legal counsel (including
counsel for the Certificateholders), independent public accountants and other
experts selected by it and shall not be liable for any action taken or
omitted to be taken in good faith by it in accordance with the advice of such
counsel, accountants or experts, (b) shall not be responsible to the
Certificateholders, the Issuer, the Custodian or the Portfolio Manager for
any statements, warranties or representations made in or in connection with
this Agreement or the other Transaction Documents (except with respect to
itself), (c) shall not be responsible to the Certificateholders, the Issuer
or the Portfolio Manager for the due execution, legality, validity,
enforceability, genuineness, sufficiency or value of this Agreement or the
other Transaction Documents (except with respect to itself), (d) shall incur
no liability under or in respect of any of the Purchaser's obligations under
this Agreement or the other Transaction Documents and (e) shall incur no
liability under or in respect of this Agreement or the other Transaction
Documents by acting upon any notice (including notice by telephone), consent,
certificate or other instrument or writing (which may be by facsimile)
27
<PAGE>
believed by it to be genuine and signed or sent by the proper party or
parties. Notwithstanding anything else herein or in the other Transaction
Documents, it is agreed that where the Funding Agent may be required under
this Agreement or the other Transaction Documents to give notice of any event
or condition or to take any action as a result of the occurrence of any event
or the existence of any condition, the Funding Agent agrees to give such
notice or take such action only to the extent that it has actual knowledge of
the occurrence of such event or the existence of such condition, and shall
incur no liability for any failure to give such notice or take such action in
the absence of such knowledge.
28
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Investment
Management Agreement to be entered into on the day and year first above
written.
INTEGRITY CAPITAL ADVISORS, INC.,
as Portfolio Manager
By: /s/ Barry G. Ward
------------------------------
Name:
Title: Controller
212 CERTIFICATE COMPANY, as Issuer
By: /s/ Robert L. Maddox
--------------------------------
Name: Robert L. Maddox
Title: President
THE CHASE MANHATTAN BANK,
as Funding Agent for the benefit of
the Certificateholders
By:
----------------------------------
Name:
Title:
29
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Investment
Management Agreement to be entered into on the day and year first above
written.
INTEGRITY CAPITAL ADVISORS, INC.,
as Portfolio Manager
By:
------------------------------
Name:
Title:
212 CERTIFICATE COMPANY, as Issuer
By:
--------------------------------
Name:
Title:
THE CHASE MANHATTAN BANK,
as Funding Agent for the benefit of
the Certificateholders
By: /s/ Andrew Taylor
----------------------------------
Name: Andrew Taylor
Title: Vice President
29
<PAGE>
EXHIBIT A
INVESTMENT GUIDELINES
A-1
<PAGE>
ARM Financial Group
SHORT-TERM PORTFOLIO GUIDELINES
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Min./Max/ Max. Per Max. Per
ASSET CLASS Exp. Issue Issuer
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Government & Agencies 0/100% unlimited unlimited
- -----------------------------------------------------------------------------
Mortgage-backed Securities
Agency CMOs 0/50% 5% 9.5%
Non-agency CMOs (residential) 0/50% 5% 9.5%
Non-agency CMOs (commercial)(1) 0/10% 5% 9.5%
Agency Pass Throughs 0/50% 5% 9.5%
Support Tranches 0/10% 5% 9.5%
- -----------------------------------------------------------------------------
Asset-backed Securities 0/30% 5% 9.5%
Auto Loans
Credit Card Receivables
Home Equity
Manufactured Housing
- -----------------------------------------------------------------------------
Corporate Debt(2) 0/60% 5% 5%
Industrials
Telecommunications
Utilities
Banks
Finance Companies
- -----------------------------------------------------------------------------
144A Private Placements(3) 0/30% 2.5% 2.5%
- -----------------------------------------------------------------------------
Foreign Debt 0/20% 2.5% 2.5%
(U.S. Dollar Denominated only)
- -----------------------------------------------------------------------------
Non-Investment Grade Securities(4) 0/5% 1% 1%
(No lower than BB/NAIC "3" rated)
- -----------------------------------------------------------------------------
Cash and Cash Equivalents(6) 0/100% 5% 5%
- -----------------------------------------------------------------------------
Non-Speculative Hedging Instruments(5) 0/3% 1% 1%
- -----------------------------------------------------------------------------
</TABLE>
(1) Investment grade securities only.
(2) No industry can exceed 35% of the portfolio
(3) There cannot be any prohibition of sale on any Private Placement
security purchased
(4) Can also include non-investment grade, U.S. dollar denominated
foreign debt. Foreign debt must be issued by OECD countries.
(5) Caps, floors, swaps only. Counterparties must be AA rated.
Caps & Floors: the lesser of purchase cost or market value. Swaps:
Absolute Value of the Market Value. Any derivative position must be
used for hedging only, and must result in the portfolio still being
in compliance with all other investment guidelines.
(6) 10% Maximum Issue/Issuer during 90 day ramp up period for A1/P1
Securities or better.
<PAGE>
Short-term Portfolio Guidelines
Page Two
GENERAL
1. The average effective duration of the portfolio cannot exceed 1.75 years.
2. The average credit quality of the portfolio cannot be less than AA/NAIC
"1".
3. The portfolio cannot contain investments in real estate, direct
commercial mortgages, common stocks, leveraged futures or other
leveraged/speculative derivatives.
4. Any derivative position must be used for hedging only and must result in
the portfolio still being in compliance with all other investment
guidelines.
<PAGE>
PORTFOLIO OBJECTIVE
Maintain a high quality, liquid, short duration portfolio which generates a
consistent and stable return in excess of the liability cost of funds.
AGGREGATE PORTFOLIO RISK PARAMETERS
The Average effective duration of the portfolio cannot exceed 1.75 years.
The average effective duration is calculated as the weighted average of the
effective duration of the individual securities within the portfolio weighted
by their respective market values. Effective duration measures the price
sensitivity of a security for a given change in interest rates, incorporating
any projected variability in the security's cashflows for the stated change
in interest rates.
The average credit quality of the portfolio cannot be less than AA/NAIC "1".
The average credit quality is calculated as the weighted average of the
credit quality of the individual securities within the portfolio weighted by
either their respective book values, or market values as appropriate per the
custodial arrangement. The individual security credit quality will be as
currently evaluated by either Moody's or Standard & Poor's.
The average credit quality is calculated by assigning a numeric value of each
rating. For example, the highest quality category of Governments is assigned
a value of 2, Agency securities receive a value of 3, Aaa/AAA 4, Aa1/AA+5,
Aa2/AA 6, Aa3/AA-7 and so on. If an individual security is evaluated by both
Moody's and Standard & Poor's, the lower rating will be used in computing
the average. The weighted average numerical value is rounded and translated
back to an average credit quality rating, i.e. an average rating of 6.4 would
translate to an AA rating, and an average rating of 6.6 would equate to AA-.
Based on the above, the average numerical value must be less than or equal to
6.5 to be in compliance with the stated investment guidelines.
PERMITTED ASSET CLASSES
U.S. GOVERNMENT AND AGENCY SECURITIES
A debt security issued by the United States Treasury Department or an agency
created and sponsored by the United States government.
MORTGAGE-BACKED SECURITIES
Ownership claim in a pool of mortgages or an obligation that is secured by
such a pool.
AGENCY CMOs
Securitization of a pool of first liens on residential properties backed
by GNMA, FNMA or FHLMC into at least two classes or tranches.
NON-AGENCY CMOs
Securitization of a pool of first liens on residential mortgages which
do not conform to agency (GNMA, FNMA or FHLMC) underwriting guidelines,
or a pool of commercial loans into at least two classes or tranches.
AGENCY PASS THROUGHS
<PAGE>
Securitization of a pool of first liens on residential properties backed
by GNMA, FNMA or FHLMC into one class, which pays monthly interest and
principal passed directly from the debtor to the investor through an
intermediary.
SUPPORT TRANCHES
CMO classes that receive principal payments only after scheduled
payments have been made on specified PAC, TAC and/or Scheduled bonds for
each payment date.
ASSET-BACKED SECURITIES
Securitization of a pool of collateral into at least two classes or tranches.
Acceptable collateral includes auto loans, credit card receivables,
home-equity loans or manufactured housing loans.
CORPORATE DEBT
Debt which is registered with the SEC and issued by either a corporation or a
public utility.
144A PRIVATE PLACEMENTS
Private unregistered security issued under SEC Rule 144A.
PRIVATE PLACEMENTS
Privately negotiated debt transactions between an issuer and buyer. Not
permitted.
FOREIGN DEBT
Debt issued by a legal entity incorporated outside of the United States.
Only U.S. dollar denominated securities are permitted.
NON-INVESTMENT GRADE SECURITIES
A security with a credit quality rating of BB+ or lower. Only securities
currently rated at least BB/NAIC "3" are permitted.
CASH AND CASH EQUIVALENTS
Short-term debt such as listed below, with a stated maturity within 270 days
from date of purchase, rated at least A-1/P-1 or the equivalent:
- U.S. Government or Agency Securities
- Certificates of Deposit
- Commercial paper
- Bankers acceptances
- Repurchase agreements
- Corporate debt rated AA or better
- Money market funds
- Loan participation notes; provided the notes are issued by A1/P1
companies and administered through A1/P1 banks.
- Bank One Money Market Deposit Account
During the 90 day ramp up period after closing, these investments can be made
in A2/P2 securities as long as the overall portfolio credit quality and
duration requirements met.
<PAGE>
EXHIBIT B
INVESTMENT PORTFOLIO MANAGER AGREEMENT
B-1
<PAGE>
INVESTMENT SERVICES AGREEMENT
-----------------------------
This is an INVESTMENT SERVICES AGREEMENT (this "Agreement") made
effective as of the 24th day of April, 1998, by and between INTEGRITY CAPITAL
ADVISORS, INC., a Delaware corporation ("Company"), and ARM CAPITAL ADVISORS,
LLC, a Delaware limited liability company ("Advisor") which is registered as
an investment adviser under the Investment Advisers Act of 1940 (the
"Advisers Act").
RECITALS
WHEREAS, certain subsidiaries (the "Subsidiaries") of ARM Financial
Group, Inc. ("ARM"), as identified on Appendix A hereto (as such Appendix A
may be revised by Company from time to time), have allocated all or a portion
of their assets to one or more segregated custodial accounts with account
numbers as designated by ARM in writing from time to time (the "Accounts")
maintained with Chase Manhattan Bank and/or such other banks as designated by
ARM in writing from time to time (the "Custodians"); and
WHEREAS, Company has agreed to provide investment services with respect
to the assets in the Accounts, but has reserved the right to sub-contract
such investment services to an affiliate or third party; and
WHEREAS, Advisor's management has extensive experience in
asset/liability and investment portfolio management and supervision; and
WHEREAS, in order to achieve certain operating economies and improve the
investment services to the benefit of the Subsidiaries and the Subsidiaries'
policyholders and/or face amount certificateholders, Company desires to
retain Advisor to supervise and manage the assets now or hereafter contained
in the Accounts; and
WHEREAS, Company and Advisor wish to assure that all charges incurred
hereunder are reasonable and in accordance with the requirements of the
Advisers Act, the Investment Company Act of 1940, the appropriate investment
provisions of the applicable state of domicile for each of the Subsidiaries,
and all other applicable laws, rules and regulations (collectively, "Laws");
and
WHEREAS, Company and Advisor wish to identify the investment advisory
services to be rendered by Advisor, and to provide a method for determining
the fees to be paid by Company in connection with such services;
<PAGE>
NOW, THEREFORE, in consideration of the premises and of the mutual
promises set forth herein, the adequacy and sufficiency of which are hereby
acknowledged, and intending to be legally bound hereby, Company and Advisor
agree as follows:
1. PERFORMANCE OF SERVICES. Subject to the terms, conditions, and
limitations of this Agreement, Advisor agrees, to the extent requested by
Company, to perform diligently and in a manner consistent with past practice
the investment advisory services as set forth in Appendix B attached hereto
and made a part of this Agreement (collectively, the "Services") with respect
to the assets now or hereafter contained in the Accounts. All charges for
services incurred hereunder shall be reasonable and in accordance with or as
required by any Laws. Advisor agrees to maintain sufficient facilities and
trained personnel of the kind necessary to perform this Agreement.
(a) CAPACITY OF PERSONNEL AND STATUS OF FACILITIES. Whenever Advisor
utilizes its personnel to perform the services pursuant to this
Agreement, such personnel shall be subject to Advisor's direction and
control, and Company shall have no liability to such personnel for their
welfare, salaries, fringe benefits, legally required employer
contributions, tax obligations or other obligations. No facility of
Advisor used in performing services for Company shall be deemed to be
transferred, assigned, conveyed, or leased by performance or use pursuant
to this Agreement.
(b) EXERCISE OF JUDGMENT IN RENDERING SERVICES. In providing any
services hereunder which require the exercise of judgement by Advisor,
Advisor shall perform such services in accordance with any standards
and guidelines which Company develops and communicates to Advisor in
writing. In performing any services hereunder, Advisor shall at all times
act in a manner reasonably calculated to be in or not opposed to the best
interests of Company and the Subsidiaries.
(c) CONTROL. The performance of services by Advisor for Company
pursuant to this Agreement shall in no way impair the absolute control
of the business and operations of Company or Advisor by their respective
Boards of Directors. Advisor shall act hereunder
2
<PAGE>
so as to assure the maintenance of the operational controls and the
separate operating identity of Company.
2. CHARGES. Company agrees to pay to Advisor for services provided by
Advisor pursuant to this Agreement the fees set forth on Appendix C attached
hereto (as such Appendix may be revised by the parties hereto from time to
time).
3. PAYMENT. Advisor shall periodically submit to Company a written
statement of the amount owed by Company for services rendered pursuant to
this Agreement for the appropriate period, and Company shall pay such amount
to Advisor within thirty (30) days of such written statement.
4. RIGHT TO CONTRACT WITH THIRD PARTIES. Nothing herein shall be deemed
to grant Advisor an exclusive right to provide services to Company, and
Company retains the right to contract with any third party, affiliated or
unaffiliated, for the performance of services as are available to or have
been requested by Company pursuant to this Agreement. It is also understood
and agreed that Advisor's services are not exclusively for Company. Advisor
shall remain free to provide services to other persons, pursuant to
objectives which may or may not be similar to the strategy adopted as
appropriate for Company.
5. CONFIDENTIALITY. In rendering its services hereunder, Advisor may be
furnished with information concerning the Company's businesses and affairs
("Confidential Information"). Advisor agrees (a) except as required by law,
to keep all Confidential Information confidential and not to disclose or
reveal any Confidential Information and (b) not to use Confidential
Information for any purpose other than rendering services hereunder.
6. CONTACT PERSONS. Company and Advisor each shall appoint one or more
individuals who shall serve as contact persons for the purpose of carrying
out this Agreement. Such contact persons shall be authorized to act on behalf
of their respective parties as to the matters pertaining to this Agreement.
Effective upon execution of this Agreement, the initial contact persons
3
<PAGE>
shall be those set forth in Section 11 of this Agreement. Each party shall
notify the other, in writing, as to the name, address, and telephone number
of any replacement for any such designated contact person.
7. TERMINATION. This Agreement may be terminated by either party hereto
at any time, upon 180 days' or more advance written notice. No penalty shall
be charged to Company upon termination of this Agreement, and following any
such termination Advisor shall promptly deliver to Company all books and
records that are, or are deemed by this Agreement to be, the property of
Company and/or the Subsidiaries.
8. NO ASSIGNMENT. This Agreement and any rights pursuant hereto shall
not be assignable by either party hereto. Except as and to the extent
specifically provided in this Agreement or as required by applicable Laws,
nothing in this Agreement, expressed or implied, is intended to confer on any
person other than the parties hereto, or their respective legal successors,
any rights, remedies, obligations, or liabilities, or to relieve any person
other than the parties hereto, or their respective legal successors, from any
obligations or liabilities that would otherwise be applicable; and the
representations, warranties, covenants, and agreements contained in this
Agreement shall be binding upon, extend to and inure to the benefit of, the
parties hereto, their, and each of their, successors respectively.
9. INDEPENDENT CONTRACTOR. In rendering its services hereunder, Advisor
shall act as an independent contractor, and any duties of Advisor arising
hereunder shall be owed exclusively to Company.
10. GOVERNING LAW. This Agreement shall be governed by, and construed
and enforced in accordance with, the internal laws of the State of New York
applicable to contracts made and to be performed entirely within that State.
11. NOTICE. All notices, statements or requests provided for hereunder
shall be deemed to have been duly given when actually given (orally or in
writing) or when delivered by hand to an
4
<PAGE>
officer of the other party, or when deposited with the U.S. Postal Service,
as first class certified or registered mail, postage prepaid, overnight
courier services, telex or telecopier, addressed:
(a) If to Company to:
ARM Financial Group, Inc.
515 West Market Street, 4th Floor
Louisville, KY 40202-3271
Telecopier: (502) 582-7995
Attention: Robert H. Scott
(b) If to Advisor to:
ARM Capital Advisors, LLC
200 Park Avenue, 20th Floor
New York, New York 10166
Telecopier: (212) 973-2201
Attention: Emad A. Zikry
or to such other persons or places as each party may from time to time
designate by written notice sent as aforesaid.
12. COMPLIANCE WITH LAWS. Advisor shall at all times comply with the
terms of this Agreement and all applicable Laws.
13. INVALID PROVISIONS. If any provision of this Agreement is held to
be illegal, invalid, or unenforceable under any present or future law, and if
the rights or obligations of Advisor or Company under this Agreement will not
be materially and adversely affected thereby, (a) such provision will be
fully severable; (b) this Agreement will be construed and enforced as if such
illegal, invalid, or unenforceable provision had never comprised a part
hereof; (c) the remaining provisions of this Agreement will remain in full
force and effect and will not be affected by the illegal, invalid, or
unenforceable provision or by its severance herefrom; and (d) in lieu of
such illegal, invalid, or unenforceable provision, there will be added
automatically as a part of this Agreement a legal, valid, and enforceable
provision as similar in terms to such illegal, invalid, or unenforceable
provision as may be possible.
5
<PAGE>
14. SECTION HEADINGS. Section headings contained herein are for
reference purposes only and shall not affect the meaning or interpretation of
this Agreement.
15. COUNTERPARTS. This Agreement may be executed in separate
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
16. INTEGRATION. This Agreement is the entire agreement between the
parties hereto with respect to the subject matter hereof and supersedes all
prior written or oral agreements related to the matters referenced herein.
6
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed in duplicate by their respective officers duly authorized so to do,
as of the date and year first above written.
INTEGRITY CAPITAL ADVISORS, INC.
By: /s/ Robert H. Scott
--------------------------------
Name: Robert H. Scott
Title: General Counsel
ARM CAPITAL ADVISORS, LLC
By: Christopher T. Kracke
-------------------------------
Name: Christopher T. Kracke
Title: Chief Financial Officer
7
<PAGE>
APPENDIX A
SUBSIDIARIES
312 Certificate Company
<PAGE>
APPENDIX B
INVESTMENT ADVISORY SERVICES
Subject to the terms, conditions and limitations of this Agreement and
the supervision by the Subsidiaries' Boards of Directories of the assets now
or hereafter contained in the respective Accounts, Advisor shall provide the
following services:
1. Except as otherwise expressly provided herein, Advisor shall be free
to buy, sell, exchange, convert, or otherwise trade the assets now or
hereafter contained in the Accounts in the exercise of its sole discretion,
provided Advisor acts in a manner consistent with any and all written
direction received from Company as to each of the Investment Policies adopted
by the Board of Directors of the respective Subsidiaries, as the same may be
modified from time to time. Advisor shall acquire or dispose of any specific
investment if so directed by the Company and/or the Board of Directors of the
applicable Subsidiaries.
2. All investments made by Advisor shall be in those classes of
investments as permitted or required by any Laws; PROVIDED, HOWEVER, that
nothing contained herein shall authorize Advisor to purchase or dispose of,
without the applicable Subsidiaries' prior written approval, any interest in
real property or mortgages.
3. In the course of its investment advisory services activity, Advisor
MAY NOT pledge, mortgage or hypothecate the assets in the Accounts, or enter
into any investment which would violate any Laws.
4. Advisor shall not at any time have custody or possession of any of
the assets in the Accounts. Custody and possession of any and all assets in
the Accounts shall at times be maintained in one or more segregated custodial
accounts maintained with the Custodians and held on behalf of and in the name
of the respective Subsidiaries. All transactions authorized by this Agreement
shall be carried out through such custodial accounts maintained with the
Custodians. Advisor shall not be responsible for any act or omission of the
Custodians thereunder.
<PAGE>
APPENDIX C
SCHEDULE OF FEES
COMPUTATION OF FEES. Company shall have the right to engage Advisor to
perform the above described investment management services at an annualized
cost of (A) twenty basis points (.0020) times the first $100 million of the
average market value of assets under management, (B) seven basis points
(.0007) times the average market value of assets under management in excess
of $100 million and up to $2 billion, (C) six basis points (.0006) times the
average market value of assets under management in excess of $2 billion and
up to $3 billion, and (D) five basis points (.0005) times the average market
value of assets under management in excess of $3 billion. Such fee to be
calculated and payable on the average of the market value of all assets in
the Accounts on the first and last days of each calendar month.
<PAGE>
EXHIBIT C
FORM OF WEEKLY REPORT
C-1
<PAGE>
Weekly Report
SUMMARY INFORMATION:
<TABLE>
<S> <C> <C> <C>
Purchase Limit $ 500,000,000 Liquidity Termination Date:
------------------- ----------
Weekly Period Ended: (Date) Payment Due Date, if any, to Issuer: (Date + 5
------------------- ----------
Date Due to Agent (Date + 3 Bus. Days) Bus. Days)
-------------------
</TABLE>
<TABLE>
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
I. RECONCELLATION OF INVESTED AMOUNT
- -----------------------------------------------------------------------------------------------------
A. BEGINNING PERIOD INVESTED AMOUNT $0.00
B. INSTALLMENT PURCHASES DURING PERIOD $0.00
C. PARTIAL AMORTIZATIONS $0.00
D. ENDING PERIOD INVESTED AMOUNT (A+B-C) $0.00
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
II. RECONCILLATION OF THE PORTFOLIO'S FAIR MARKET VALUE (FMV)
- -----------------------------------------------------------------------------------------------------
A. BEGINNING PERIOD FMV OF SECURITIES AND SHORT-TERM INVESTMENTS $0.00
B. ENDING PERIOD FMV OF SECURITIES AND SHORT-TERM INVESTMENTS $0.00
C. ENDING PERIOD FREE CASH BALANCE IN CUSTODIAL ACCOUNT $0.00
D. ENDING PERIOD TOTAL PORTFOLIO FMV (B+C) $0.00
E. CHANGE IN FMV OF SECURITIES AND SHORT-TERM INVESTMENTS (A-B) $0.00
F. ENDING PORTFOLIO FMV/ENDING INVESTED AMOUNT (D/I.D) $0.00
G. SHORTFALL AMOUNT (I.D-D, IF DIFFERENCE >3%); DUE FROM SWAP PROVIDER TO ISSUER $0.00
- -----------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit D
---------
FORM OF SETTLEMENT REPORT
D-1
<PAGE>
Settlement Report
SUMMARY INFORMATION:
<TABLE>
<S> <C> <C> <C>
Purchase Limit: $ 500,000,000 Liquidity Termination Date:
------------------- ----------
Settlement Period Ended: 31-May-98 Applicable LIBOR Rate:
------------------- ----------
Date Due to Agent: (Settlement Date) Blended LIBOR Rate:
------------------- ----------
</TABLE>
<TABLE>
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
I. RECONCILIATION OF INVESTED AMOUNT
- -------------------------------------------------------------------------------------------------------
A. BEGINNING PERIOD INVESTED AMOUNT $0.00
B. INSTALLMENT PURCHASES DURING PERIOD $0.00
C. PARTIAL AMORTIZATIONS $0.00
D. ENDING PERIOD INVESTED AMOUNT (A+B-C) $0.00
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
II. RECONCILIATION OF THE PORTFOLIO'S FAIR MARKET VALUE (FMV)
- -------------------------------------------------------------------------------------------------------
A. BEGINNING PERIOD FMV OF SECURITIES AND SHORT-TERM INVESTMENTS $0.00
B. ENDING PERIOD FMV OF SECURITIES AND SHORT-TERM INVESTMENTS $0.00
C. ENDING PERIOD FREE CASH BALANCE IN CUSTODIAL ACCOUNT $0.00
D. ENDING PERIOD TOTAL PORTFOLIO FMV (B+C) $0.00
E. CHANGE IN FMV OF SECURITIES AND SHORT-TERM INVESTMENTS (A-B) $0.00
F. ENDING PORTFOLIO FMV/ENDING INVESTED AMOUNT (D/I.D) 0.00%
G. SHORTFALL AMOUNT (I.D-D, IF DIFFERENCE GREATER THAN 3%); DUE FROM SWAP PROVIDER $0.00
H. SURPLUS AMOUNT (I.D-D, IF FMV GREATER THAN INV. AMT.) $0.00
- -------------------------------------------------------------------------------------------------------
Surplus Amount can be paid to either the Issuer or the Parent, at the Issuer's discretion.
- -------------------------------------------------------------------------------------------------------
III. SETTLEMENT PERIOD PORTFOLIO BOOK INCOME DETERMINATION
- -------------------------------------------------------------------------------------------------------
A. INTEREST INCOME RECEIVED $0.00
B. LESS: ACCRUED INTEREST PAID $0.00
C. PLUS: ACCRUED INCOME ON PORTFOLIO AT END OF PERIOD $0.00
D. LESS: ACCRUED INCOME ON PORTFOLIO AT BEGINNING OF PERIOD $0.00
E. PLUS: ACCRETION OF DISCOUNT $0.00
F. LESS: AMORTIZATION OF PREMIUMS $0.00
G. BOOK INCOME (A-B+C-D+E-F) $0.00
H. BOOK INCOME BLENDED LIBOR EQUIVALENT (BLENDED LIBOR+__bps)
- -------------------------------------------------------------------------------------------------------
IV. PRIORITY OF PAYMENTS
- -------------------------------------------------------------------------------------------------------
A. TO ISSUER, FOR ACCRUED AND UNPAID FRANCHISES TAXES PAYABLE $0.00
B. IF APPLICABLE, TO ALTERNATE PORTFOLIO MANAGER $0.00
C. TO CUSTODIAN, FOR ACCRUED AND UNPAID FEES $0.00
D. TO AGENT, FOR PAYMENT OF CERTIFICATE YIELD $0.00
E. TO, AGENT, FOR REIMBURSEMENT OF OTHER ACCRUED FEES $0.00
F. TO ISSUER, FOR ACCRUED AND UNPAID OPERATING EXPENSES $0.00
G. PROGRAM COST SUBTOTAL $0.00
H. PROGRAM COST LIBOR EQUIVALENT (BLENDED LIBOR+__ bps) 0.00
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
V. REQUIRED SWAP PAYMENT (IF ANY) BY SWAP PROVIDER:
PROGRAM COST SUBTOTAL - BOOK INCOME (IV.G-III.G) $0.00
APPROXIMATE LIBOR SPREAD (bps) (IV.H-III.H) 0.00
- -------------------------------------------------------------------------------------------------------
</TABLE>
Page 1
<PAGE>
Settlement Report
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
VI. BOOK INCOME AVAILABLE FOR DISTRIBUTIONS
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
A. BOOK INCOME (III.G) $0.00
B. LESS: PROGRAM COST SUBTOTAL (IV.G) $0.00
C. LESS: PORTFOLIO MANAGER FEE (.0025/12*((I.A+I.D)/2)) $0.00
D. BOOK INCOME AVAILABLE TO SWAP PROVIDER $0.00
(PROVIDED FMV GREATER THAN INV. AMT.)
- -------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
VII. PORTFOLIO MONITORING
- -------------------------------------------------------------------------------------------------------
Termination
Actual Trigger
------ -----------
<S> <C> <C> <C>
A. PORTFOLIO WEIGHTED AVERAGE CREDIT QUALITY LESS THAN AA
B. PORTFOLIO AVERAGE EFFECTIVE DURATION GREATER THAN 1.75
C. PERCENTAGE FIXED RATE COUPONS IN PORTFOLIO GREATER THAN 60%
D. IN COMPLIANCE? YES
- -------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
- -------------------------------------------------------------------------------------------------------
VIII. PAYMENT SUMMARY SECTION:
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
A. TO ISSUER (IV.A+IV.F): $0.00
B. TO CUSTODIAN (IV.C): $0.00
C. TO AGENT (IV.D+IV.E): $0.00
D. TO PORTFOLIO MANAGER (VI.C): $0.00
E. TO SWAP PROVIDER (VI.D): $0.00
F. TO ISSUER OR PARENT, IF AVAILABLE, AT ISSUER'S DISCRETION (II.H): $0.00
- -------------------------------------------------------------------------------------------------------
</TABLE>
This Compliance Certificate is furnished pursuant to that certain Face Amount
Certificate Agreement (the "Agreement") dated as of , 1998, among
, (the "Issuer"), (the "Certificateholder")
and , as agent for such Certificateholder.
THE UNDERSIGNED HEREBY CERTIFIES THAT:
1. I am the duly elected officer of the Issuer.
2. I have reviewed the terms of the Agreement and I have made, or have caused
to be made under my supervision, a detailed review of the transactions and
conditions of the Issuer during the Settlement Period covered by this
Settlement Report.
3. The examinations described in paragraph 2 did not disclose, and I have no
knowledge of, the existence of any condition or event which constitutes an
Amortization Event or a Material Adverse Effect, as each such term is
defined under the Agreement, during or at the end of the Settlement Period
covered by this Settlement Report or as of the date of my signature,
except as set below; and
4. This Settlement Report sets forth financial data and computations
evidencing the compliance with certain covenants of the Agreement, all of
which data and computations are true, complete, and correct.
5. Described on an attached sheet are the exceptions, if any, to paragraph 3
by listing, in detail, the nature of the condition or event, the period
during which it has existed and the action which the Issuer has taken, is
taking, or proposes to take with respect to each such condition or event;
The foregoing certifications, together with the computations set forth in
this Settlement Report are made and delivered this ____ day of ________,
19__.
--------------------------------
Page 2
<PAGE>
Exhibit E
---------
FORM OF MONTHLY COMPLIANCE REPORT
E-1
<PAGE>
Monthly Compliance Report
SUMMARY INFORMATION:
<TABLE>
<S> <C> <C> <C>
Purchase Limit: $500,000,000 Liquidity Termination Date:
------------ ---------------------
As of Last Day of Settlement Period: (Date)
------------
Due to Agent on Settlement Date: (Date)
------------
</TABLE>
<TABLE>
<CAPTION>
Maximum Actual Maximum Actual
Maximum Actual Per Issue Per Issue Per Issuer Per Issuer
Asset Class Exposure Exposure Exposure Exposure Exposure Exposure
- ----------- -------- -------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
U.S. Government & Agencies 100% n/a n/a
Mortgage-backed Securities
Agency CMOs 50% 5% 9.5%
Non-Agency CMOs (residential) 50% 5% 9.5%
Non-Agency CMOs (commercial) 10% 5% 9.5%
Agency Pass Throughs 50% 5% 9.5%
Support Tranchee 10% 5% 9.5%
Asset-backed Securities 30% 5% 9.5%
Auto Loans
Credit Card Receivables
Home Equity
Manufactured Housing
Corporate Debt 60% 5% .5%
Industries
Telecommunications
Utilities
Banks
Finance Companies
144A Private Placements 30% 2.5% 2.5%
Foreign Debt 20% 2.5% 2.5%
Non-Investment Grade Securities 5% 1% 1%
Cash & Cash Equivalents 100% 5% 5%
Non-Speculative Hedging Instruments 3% 1% 1%
[COMPLIANCE PARAGRAPH]
Page 1
</TABLE>
Page 1
<PAGE>
Exhibit 10.32
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as
of the 1st day of March, 1999 (the "Effective Date"), by and between ARM
FINANCIAL GROUP, INC., a Delaware corporation with its principal place of
business in the Commonwealth of Kentucky (the "Company"), and Martin H. Ruby
("Executive").
WHEREAS the parties have executed an employment agreement dated July 1,
1996, which has been amended from time to time (the "1996 Agreement") and which
provides certain benefits in the event of a change in control of the Company;
and
WHEREAS the parties desire to terminate and replace the 1996 Agreement
with the present Agreement, and to restate the terms and conditions of
Executive's employment with the Company,
NOW, THEREFORE, in consideration of the mutual covenants hereinafter
set forth, the parties agree as follows:
1. EMPLOYMENT.
A. POSITION. The Company wishes to employ and the Executive hereby
accepts the position of Chairman of the Board and Chief Executive Officer for
the Term (as defined in Section 2 below). Executive shall have such
responsibilities and powers normally associated with such office. Executive
shall perform such other duties as are commensurate with Executive's position,
and as may be determined by the Board of Directors of the Company (the "Board")
from time to time.
B. EXECUTIVE'S COMMITMENT. Executive shall consider his employment by
the Company as his principal employment, shall devote the necessary time and
attention to his duties and responsibilities under this Agreement, and shall
perform them to the best of his abilities. While subject to any provisions of
this Agreement, Executive shall maintain loyalty to the Company, and shall take
no action which would directly or indirectly promote any competitor without the
approval of the Company, or injure any of the Company's interests. Subject to
the foregoing and Section 7 below, Executive may engage in other charitable,
civic, or business activities to the extent that they do not interfere with his
obligations under this Agreement, provided that Executive's participation in
those activities shall be subject to the Company's ongoing approval.
2. TERM OF EMPLOYMENT.
Unless terminated earlier as provided in Sections 4 and 5, the initial
term of Executive's employment shall be three years to commence with the
Effective Date (as it may be extended pursuant to the following sentence, the
"Term"). Commencing on the third anniversary date of this Agreement and on each
anniversary date thereafter the term of this Agreement shall be
<PAGE>
automatically extended for a period of one year, and shall continue in effect
from year-to-year, unless (i) either party gives written notice of its intent to
terminate this Agreement at least 180 days prior to an anniversary date (a
"Nonrenewal Notice"), or (ii) this Agreement is terminated as hereinafter set
forth in Sections 4 and 5.
3. COMPENSATION AND BENEFITS.
A. BASE SALARY. Commencing with the Effective Date, the Company shall
pay Executive a base salary of $500,000 per annum, payable in accordance with
the Company's prevailing payroll policies. The Compensation Committee of the
Board shall review the Executive's base salary no less frequently than annually,
and on the basis of such review, may increase (but not decrease) such base
salary (as it may be so increased, the "Base Salary").
B. BONUS. Executive is entitled to participate in a cash bonus plan on
the same basis as similarly situated executives as may be determined by the
Compensation Committee, in its sole discretion.
C. BENEFITS. The Executive shall, during his employment under this
Agreement, be included to the extent eligible thereunder in all employee benefit
plans, programs or arrangements (including, without limitation, any plans,
programs or arrangements providing for retirement benefits, incentive
compensation, profit sharing, bonuses, disability benefits, health, dental and
life insurance, or vacation and paid holidays) which shall be established by the
Company for, or made available to, similarly situated executives. The Company
shall indemnify Executive to the fullest extent permitted by Delaware law and
the Company's Certificate of Incorporation and ByLaws, and the Company shall
procure and maintain insurance policies, to the extent reasonably available, for
the benefit of its directors and officers, including Executive.
4. TERMINATION OF EMPLOYMENT.
A. TERMINATION WITHOUT CAUSE; FAILURE TO RENEW WITHOUT CAUSE;
RESIGNATION FOR GOOD REASON. If, during the Term, Executive's employment is
terminated without Cause, the Company delivers a Nonrenewal Notice without
Cause, or if Executive resigns from his employment for Good Reason, the Company
shall pay executive severance pay in an amount equal to two times the sum of:
(1) Executive's Base Salary and (2) the greater of (i) the percentage of
Executive's actual earnings used to calculate bonus paid to the Executive in the
year preceding termination of employment multiplied by Base Salary or (ii) the
average of bonuses paid Executive over the last three years preceding the
termination or resignation, (the "Severance Payment"). The Severance Payment
shall be paid over twenty-four months in such equal installments as are
consistent with the Company's prevailing payroll policies. The Severance Payment
is subject to Executive fulfilling certain stipulations set forth in Section
4(A) hereof. Executive shall also be entitled to receive a PRO RATA portion of
any bonus paid for the year of termination payable at such time as payments are
generally made under the bonus plan, such bonus shall equal the greater of (i)
the percentage of Executive's actual earnings used to calculate bonus paid to
the Executive in the year preceding termination of employment multiplied by Base
Salary or (ii) the average of bonuses paid Executive over the last three years
2
<PAGE>
preceding the termination or resignation, multiplied by a fraction where the
numerator is the number of days during the year that Executive was employed by
the Company and the denominator is 365. Additionally, the Company shall continue
to pay all (or the applicable portion) of the premiums for such group insurance
benefits (such as health, life, and disability insurance policies) that covered
Executive on the day next preceding Executive's termination of employment for
twenty-four months following termination under this Section 4(A). Executive
shall have no further right to receive any other compensation or benefits after
termination or resignation except as may be provided by the terms of the
Company's employee benefit plans or programs.
1. RELEASE OF CLAIMS. To receive the severance benefits described in this
Section 4(A), Executive must execute in a form reasonably suitable to
the Company a release and waiver of all claims Executive may have
against the Company, or any of its subsidiaries, parents, officers,
directors, and agents arising out of Executive's employment with the
Company or the termination or resignation of employment, including any
claims for employment discrimination under any and all statutes and
regulations which prohibit employment discrimination because of race,
sex, national origin, color, age, religion, disability, or veteran's
status, including but not limited to the Federal Age Discrimination in
Employment Act.
2. FURTHER STIPULATIONS. The Company may not terminate any severance
payments and insurance premium payments due Executive under this
Section 4(A) prior to a ruling or order issued by an arbitration panel
or court of competent jurisdiction finding that the Executive has
materially breached Section 6 or 7 of this Agreement and that such a
remedy is equitable hereunder.
3. DEATH BEFORE SEVERANCE IS PAID. Any severance due Executive at the time
Executive dies shall be paid when due under Section 4(A) to the
beneficiary designated by the Executive in writing to receive these
funds, or if no beneficiary is designated, to the Executive's estate.
B. TERMINATION FOR CAUSE; FAILURE TO RENEW FOR CAUSE; RESIGNATION
WITHOUT GOOD REASON. If, during the Term, the Company terminates Executive's
employment for Cause or if Executive resigns without Good Reason, then Executive
shall be entitled to receive Base Salary through the date specified in the
notice of termination, or 10 business days after receipt by the Company of a
notice of resignation. Executive shall have no further rights to receive any
other form of compensation or benefits after such termination or resignation of
employment, except as determined in accordance with the terms of the Company's
employee benefit plans or programs.
1. CAUSE. Termination for Cause shall mean termination of Executive's
employment because of:
(i) any act or omission by Executive that constitutes a material
breach of this Agreement;
3
<PAGE>
(ii) the continued failure or refusal of Executive to
perform the material duties required of him as an employee of
the Company (other than because of death or disability);
(iii) any willful material violation by the Executive
of any law or regulation applicable to the business of the
Company or its subsidiaries, or the Executive's conviction of
a felony, or any willful perpetration by the Executive of a
common law fraud; or
(iv) any willful misconduct by Executive which causes
material financial injury to the Company or materially harms
its business reputation, or otherwise is materially injurious
to the Company, its subsidiaries, or affiliates;
provided, however, that if any such Cause relates to Executive's
obligations under this Agreement and is (x) susceptible to cure and (y)
does not constitute a repetition of Cause, then the Company shall not
terminate Executive's employment hereunder unless the Company first
gives Executive notice of its intention to terminate and of the grounds
for such termination, and Executive has not, within 10 business days
following receipt of the notice, cured such Cause, or in the event such
Cause is not susceptible to cure within such 10 business day period,
Executive has not taken all reasonable steps within such 10 business
day period to cure such Cause as promptly as practicable thereafter;
and provided further that no action or omission shall be deemed to be
Cause if taken in reliance upon the clear directive of the Company's
Board of Directors.
2. GOOD REASON. Resignation with Good Reason, for purposes
of this Agreement, shall mean any of the following (without
Executive's written consent):
(i) a reduction in Executive's Base Salary or a
failure by the Company to pay material compensation when due
in connection with Executive's employment;
(ii) material diminution of authority,
responsibilities or positions of Executive;
(iii) the failure of a successor to the Company to
assume and agree to and abide by the terms and condition of
this Agreement; or
(iv) the failure to fully compensate Executive for
any increase in Executive's cost of living associated with the
Company's relocation of Executive's place of employment,
including without limitation, costs associated directly with
such relocation, housing costs, and any differences in the
appropriate cost of living indices;
provided, however, that if any such Good Reason is (x) susceptible to
cure and (y) does not constitute a repetition of Good Reason, then
Executive shall not terminate his
4
<PAGE>
employment hereunder unless Executive first gives the Company notice
of his intention to terminate and of the grounds for such termination,
and the Company has not, within 10 business days following receipt of
the notice, cured such Good Reason, or in the event such Good Reason
is not susceptible to cure within such 10 business day period, the
Company has not taken all reasonable steps within such 10 business day
period to cure such Good Reason as promptly as practicable thereafter.
C. CHANGE OF CONTROL. In the event of a Change of Control (as defined
below), the Executive may terminate his employment and this Agreement upon 30
days' written notice to the Company during the 30-day period following the
18-month period after the occurrence of the Change of Control (or such shorter
period to the extent the acquiring company does not request the services of the
Executive for such 18-month period). In the event of such a termination by
Executive, Executive shall be entitled to receive all of the benefits described
in Section 4(A) above (subject to compliance with the conditions set forth
therein). For purposes of this Agreement, a "Change of Control" shall have the
meaning ascribed thereto in the Company's 1997 Equity Incentive Plan in its form
on the effective date of this Agreement.
5. DEATH OR DISABILITY.
In the event of the termination of Executive's employment by reason of
death or Permanent Disability (as herein defined) the Executive (or his estate,
if applicable) shall be entitled to compensation and benefits under Section 3
through the date of termination, which is the date of death or the date
Executive commences to receive permanent disability benefits under the Company's
disability insurance program. Executive shall also be entitled to receive a PRO
RATA portion of any bonus paid for the year of termination payable at such time
as payments are generally made under the bonus plan and subject to the
attainment of the performance goals thereunder. The Executive (or his estate or
guardian) shall have no further right to receive any other compensation or
benefits after such termination except as may be determined in accordance with
the terms of the Company's employee benefit plans or programs. For purposes of
this agreement, "permanent disability" means a physical or mental disability or
infirmity of the Executive which prevents the normal performance of
substantially all of his duties as an employee of the Company, which disability
or infirmity shall exist, or in the opinion of an independent physician is
reasonably likely to exist, for any continuous period of 180 days or days
aggregating 180 days in any one year period.
6. CONFIDENTIALITY.
A. CONFIDENTIAL INFORMATION. "Confidential Information" means
information in whatever form, including information that is written,
electronically stored, orally transmitted, or memorized, which has a commercial
value to the Company and which is created, discovered, developed, or otherwise
becomes known to the Company, or in which property rights are held, assigned to
or otherwise acquired by or conveyed to the Company, including any system,
method, technique, research and development, technology, software, technical
information, trade secret, trademark, copyrighted material, reports, records,
documentation, data, customer or supplier lists, tax or financial information
(including the revenues, profits, and costs associated
5
<PAGE>
with any of the Company's products or services), business or marketing plans,
strategy, pricing information or forecasts. Confidential Information does not
include information which becomes generally known within the Company's industry
through no act or omission by Executive.
B. OWNERSHIP; DISCLOSURE. Any Confidential Information, whether or not
developed by Executive, shall at all times be the Company's exclusive property.
Executive shall, upon termination of employment, return the original and any
copy of Confidential Information to the Company.
C. RESTRICTION. During the term of this Agreement, and at any time
thereafter Executive shall not without the Company's prior written consent
specifically referring to this covenant,
(1) use any Confidential Information for the benefit of himself
or any other party other than the Company or disclose it to
any other person or entity;
(2) remove Confidential Information or documentation, device,
plan, or other records pertaining to Company's business from
the Company's premises, except when specifically authorized
to do so in pursuit of the Company's business; or
(3) retain copies or other records of any such items.
D. PURPOSE. The parties acknowledge and agree that the Confidential
Information is a valuable business asset, and this section is necessary to
protect the Company's legitimate business interests.
7. COVENANT NOT TO COMPETE/NON-SOLICITATION.
A. COVENANT. During the time of his employment and for a period of two
years following termination of employment, subject to the last sentence of this
Section 7(A), the Executive shall not, without prior written consent of the
Company, which in its exclusive discretion it may withhold, directly or
indirectly, for any reason:
(1) engage in, assist, or have any interest in, including without
limitation as a principal, consultant, employee, owner,
shareholder, director, officer, partner, member, advisor,
agent or financier, any activity which is in competition with
the Company where the Company does business; provided, this
subsection shall not prohibit investment by the Executive not
exceeding five percent (5%) of the outstanding securities of
a publicly traded company so long as he does not serve as an
employee, director or consultant with respect to any
activities of such corporation which are in competition with
the Company where the Company does business;
(2) directly or indirectly influence any of the Company's
employees, officers, agents, or consultants to terminate
their employment or relationship with the Company or accept
employment or a business relationship with any of the
Company's competitors;
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(3) interfere with or solicit for any purpose contrary to the
best interests of the Company any of the Company' s contracts
or business relationships, including without limitation those
with customers, suppliers, consultants, attorneys, or other
agents, whether evidenced by written or oral agreement; or
(4) at no time during or after termination of employment shall
Executive or the Company utter, issue or circulate any false,
inappropriate or disparaging statements, remarks or rumors
about each other unless giving truthful testimony under
subpoena.
Notwithstanding the foregoing, Section 7(A)(1) shall not apply following the
Company's termination of Executive's employment without Cause, the Executive's
resignation with Good Reason, either party's non-renewal by delivery of a
Nonrenewal Notice, or in any event after a Change in Control. For purposes of
Sections 6 and 7 of this Agreement, the "Company" shall mean the Company
together with its subsidiaries.
B. EXTENSION OF RESTRICTED PERIOD. The period of applicability of
Section 7(A) shall be extended an additional day for each day on which Executive
is in breach of Section 7(A).
8. REMEDIES.
A. IRREPARABLE HARM. The parties acknowledge and agree that
irreparable harm would result in the event of a threatened or actual material
breach by either party of Section 6 or 7 of this Agreement. Therefore, in such
an event, and notwithstanding any other provision of this Agreement,
(1) The non-breaching party shall be entitled to a restraining
order, order of specific performance, or other injunctive
relief, without showing actual damage and without bond or
other security;
(2) The Company's obligation in making payment or providing any
benefit under this Agreement, including without limitation
any severance benefits, shall immediately cease upon the
Company's obtaining an order or ruling described in
Section 4(A)(2) of this Agreement.
(3) If the Executive breaches Section 7 of this Agreement the
parties agree that the Company may seek relief in any court
having jurisdiction of the dispute and shall be entitled to
an injunction to enforce Section 7 for a period of two (2)
years following the Executive's last breach.
B. REMEDIES NOT EXCLUSIVE. Neither party's remedies hereunder are
exclusive, they shall not prejudice or prohibit any other rights or remedies
under this Agreement or otherwise. To the extent required to be enforced by
applicable law, the cessation of the Company's obligations to make payments and
continue benefits under this Agreement shall deemed to be in the nature of
liquidated damages and not a penalty. If for any reason, it is held that the
restrictions under Section 6 or 7 are not reasonable or that consideration
therefor is inadequate,
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such restrictions shall be interpreted or modified to include as much of the
duration and scope identified in Section 6 or 7 as will render such restrictions
valid and enforceable.
9. ADDITIONAL PAYMENT.
A. GROSS-UP PAYMENT. Notwithstanding anything herein to the contrary,
if it is determined that any Payment (as defined below) would be subject to the
excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as
amended (the "Code") or any interest or penalties with respect to such excise
tax (such excise tax, together with any interest or penalties thereon, is herein
referred to as an "Excise Tax"), then Executive shall be entitled to an
additional payment (a "Gross-Up Payment") in an amount that will place Executive
in the same after-tax economic position that Executive would have enjoyed if the
Excise Tax had not applied to the Payment. The amount of the Gross-Up Payment
shall be determined by the Accounting Firm (as defined below) in accordance with
the formula {(E x (1 - M)/(1 - T)) - E} (or such other formula as the Accounting
Firm deems appropriate which is intended to achieve the same result), where
E equals the Payments which are determined to be "excess
parachute payments" within the meaning of Section 280G(b)(1) of the
Code;
M equals the sum of the highest marginal rates(1) for Taxes
(as defined below) applicable to Executive at the time of the Payment;
and
- ------------------
(1)To be expressed in up to three decimal places. For example, a combined
federal, state and local marginal rate of 56% would be expressed as .560
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T equals M plus the rate of Excise Tax applicable to the Payment.
No Gross-Up Payments shall be payable hereunder if the Accounting Firm
determines that the Payments are not subject to an Excise Tax.
B. DETERMINATION OF GROSS-UP PAYMENT. Subject to the provisions of
Section 9(C), all determinations required under this Section 9, including
whether a Gross-Up Payment is required, the amount of the Payments constituting
excess parachute payments, and the amount of the Gross-Up Payment, shall be made
by the Accounting Firm, which shall provide detailed supporting calculations to
both Executive and the Company within fifteen days of the Change in Control
Date, Executive's Date of Termination or any other date reasonably requested by
Executive or the Company on which a determination under this Section 9 is
necessary or advisable. The Company shall pay to Executive the initial Gross-Up
Payment within 5 days of the receipt by Executive and the Company of the
Accounting Firm's determination. If the Accounting Firm determines that no
Excise Tax is payable by Executive, the Company shall cause the Accounting Firm
to provide Executive with an opinion that the Accounting Firm has substantial
authority under the Code and Regulations not to report an Excise Tax on
Executive federal income tax return. Any determination by the Accounting Firm
shall be binding upon Executive and the Company. If the initial Gross-Up Payment
is insufficient to cover the amount of the Excise Tax that is ultimately
determined to be owing by Executive with respect to any Payment (hereinafter an
"Underpayment"), the Company, after exhausting its remedies under Section 9(C)
below, shall promptly pay to Executive an additional Gross-Up Payment in respect
of the Underpayment.
C. PROCEDURES. Executive shall notify the Company in writing of any
claim by the Internal Revenue Service that, if successful, would require the
payment by the Company of a Gross-Up Payment. Such notice shall be given as soon
as practicable after Executive knows of such claim and shall apprise the Company
of the nature of the claim and the date on which the claim is requested to be
paid. Executive agrees not to pay the claim until the expiration of the
thirty-day period following the date on which Executive notifies the Company, or
such shorter period ending on the date the Taxes with respect to such claim are
due (the "Notice Period"). If the Company notifies Executive in writing prior to
the expiration of the Notice Period that it desires to contest the claim,
Executive shall: (i) give the Company any information reasonably requested by
the Company relating to the claim; (ii) take such action in connection with the
claim as the Company may reasonably request, including, without limitation,
accepting legal representation with respect to such claim by an attorney
reasonably selected by the Company and reasonably acceptable to Executive; (iii)
cooperate with the Company in good faith in contesting the claim; and (iv)
permit the Company to participate in any proceedings relating to the claim.
Executive shall permit the Company to control all proceedings related to the
claim and, at its option, permit the Company to pursue or forgo any and all
administrative appeals, proceedings, hearings, and conferences with the taxing
authority in respect of such claim. If requested by the Company, Executive
agrees either to pay the tax claimed and sue for a refund or contest the claim
in any permissible manner and to prosecute such contest to a determination
before any administrative tribunal, in a court of initial jurisdiction and in
one or more appellate courts as the Company shall determine; PROVIDED, HOWEVER,
that, if the Company directs Executive to pay such
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claim and pursue a refund, the Company shall advance the amount of such payment
to Executive on an after-tax and interest-free basis (the "Advance"). The
Company's control of the contest related to the claim shall be limited to the
issues related to the Gross-Up Payment and Executive shall be entitled to settle
or contest, as the case may be, any other issues raised by the Internal Revenue
Service or other taxing authority. If the Company does not notify Executive in
writing prior to the end of the Notice Period of its desire to contest the
claim, the Company shall pay to Executive an additional Gross-Up Payment in
respect of the excess parachute payments that are the subject of the claim, and
Executive agrees to pay the amount of the Excise Tax that is the subject of the
claim to the applicable taxing authority in accordance with applicable law.
D. REPAYMENTS. If, after receipt by Executive of an Advance, Executive
becomes entitled to a refund with respect to the claim to which such Advance
relates, Executive shall pay the Company the amount of the refund (together with
any interest paid or credited thereon after Taxes applicable thereto). If, after
receipt by Executive of an Advance, a determination is made that Executive shall
not be entitled to any refund with respect to the claim and the Company does not
promptly notify Executive of its intent to contest the denial of refund, then
the amount of the Advance shall not be required to be repaid by Executive and
the amount thereof shall offset the amount of the additional Gross-Up Payment
then owing to Executive.
E. FURTHER ASSURANCES. The Company shall indemnify Executive and hold
Executive harmless, on an after-tax basis, from any costs, expenses, penalties,
fines, interest or other liabilities ("Losses") incurred by Executive with
respect to the exercise by the Company of any of its rights under this Section
9, including, without limitation, any Losses related to the Company's decision
to contest a claim or any imputed income to Executive resulting from any Advance
or action taken on Executive's behalf by the Company hereunder. The Company
shall pay all reasonable legal fees and expenses incurred under this Section 9,
and shall promptly reimburse Executive for the reasonable expenses incurred by
Executive in connection with any actions taken by the Company or required to be
taken by Executive hereunder. The Company shall also pay all of the fees and
expenses of the Accounting Firm, including, without limitation, the fees and
expenses related to the opinion referred to in Section 9(B).
F. DEFINITIONS. "ACCOUNTING FIRM" shall mean Ernst & Young or, if such
firm is unable or unwilling to perform such calculations, such other national
accounting firm as shall be designated by agreement between Executive and the
Company.
"CHANGE IN CONTROL DATE" shall mean the date on which the Change in
Control occurs.
"EQUITY PLANS" means the Company's Amended and Restated Stock Option
Plan, the Company's 1997 Equity Incentive Plan, as each may be amended from time
to time and any successor plans.
"PAYMENT" means (i) any amount due or paid to Executive under this
Agreement, (ii) any amount that is due or paid to Executive under any plan,
program or arrangement of the Company and its subsidiaries (including, without
limitation, the Equity Plans) and (iii) any amount or benefit that is due or
payable to Executive under this Agreement or under any plan, program or
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arrangement of the Company and its subsidiaries not otherwise covered under
clause (i) or (ii) hereof which must reasonably be taken into account under
Section 280G of the Code and the Regulations in determining the amount the
"parachute payments" received by Executive, including, without limitation, any
amounts which must be taken into account under the Code and Regulations as a
result of (A) the acceleration of the vesting of any option, restricted stock or
other equity award granted under the Equity Plans or otherwise, (B) the
acceleration of the time at which any payment or benefit is receivable by
Executive or (C) any contingent severance or other amounts that are payable to
Executive.
"REGULATIONS" shall mean the proposed, temporary and regulations under
Section 280G of the Code or any successor provision thereto.
"TAXES" shall mean the federal, state and local income taxes to which
Executive is subject at the time of determination, calculated on the basis of
the highest marginal rates then in effect, plus any additional payroll or
withholding taxes to which Executive is then subject.
G. ALTERNATIVE TO THE GROSS-UP PAYMENT. Notwithstanding anything to the
contrary in this Agreement, Executive hereby agrees that the Payments to be made
to Executive shall be reduced (and no Gross-up Payment will be paid to
Executive) so that none of the Payments constitute "parachute payments" within
the meaning of Section 280G(b)(2) of the Code, if, and only if, the Accounting
Firm determines that such reduction would result in the aggregate after excise
tax (but before income tax) value of the Payments so reduced being no more than
$20,000 less than the after excise tax (but before income tax) value of the sum
of the Payments and the relevant Gross-up Payment (assuming that the Payments
had not been reduced and a Gross-up Payment was paid to Executive).
10. ARBITRATION.
A. Any dispute or controversy arising under or in connection with this
Agreement and any claim by Executive that the Company breached any statutory or
common law duty to Executive (including but not limited to the law of tort,
contract, and all federal, state or local laws prohibiting employment
discrimination because of race, color, religion, sex, national origin, age,
veteran's status, or disability) that cannot be mutually resolved by the parties
hereto shall be settled exclusively by arbitration in Louisville, Kentucky
before one arbitrator of exemplary qualifications and stature, who shall be
selected jointly by the Company and the Executive, or, if the Company and the
Executive cannot agree on the selection of the arbitrator, shall be selected by
the American Arbitration Association (provided that any arbitrator selected by
the American Arbitration Association shall not, without the consent of the
parties hereto, be affiliated with the Company or the Executive or any of their
respective affiliates). Judgment may be entered on the arbitrator's award in any
court having jurisdiction. The parties hereby agree that the arbitrator shall be
empowered to enter an equitable decree mandating specific enforcement of the
terms of this Agreement, or in the event the arbitrator is resolving a dispute
over the breach of a statutory or common law duty, the parties agree that the
arbitrator shall be empowered to fashion a remedy that would have been available
had the matter been litigated in a judicial or administrative proceeding. The
Company shall bear all expenses of the arbitrator incurred in any arbitration or
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any court costs incurred in any court proceeding hereunder and shall promptly
reimburse the Executive (within 30 days of invoice) for any related reasonable
legal fees and out-of-pocket expenses directly attributable to such arbitration
or any court proceeding related to this Agreement; provided that such legal fees
are calculated on an hourly, and not on a contingency fee, basis; and, that the
Executive shall bear all expenses of the arbitrator and all of his legal fees
and out-of-pocket expenses (and reimburse the Company for its portion of such
expenses) if the arbitrator or relevant trier-of-fact determines that the
Executive's claim or position was frivolous and without reasonable foundation.
B. The parties agree that this requirement to arbitrate shall not apply
to any suit by either party seeking an injunction and/or damages for violation
of Sections 6 and/or 7 of this Agreement, it being specifically understood that
such claims arising under Sections 6 or 7 may be enforced in the first instance
in any court having jurisdiction of the parties.
C. If either party appeals the decision of the arbitrator, each party
shall bear its own expenses until the outcome of such appeal has been
determined, whereupon the prevailing party's expenses, including reasonable
legal fees, shall be reimbursed promptly by the other party.
11. MISCELLANEOUS.
A. NOTICES. All notices or communications hereunder shall be in
writing addressed as follows:
To the Company:
ARM Financial Group, Inc.
515 West Market Street
Louisville, Kentucky 40202-3271
Telecopier No.: (502) 582-7903
Attention: General Counsel
To the Executive:
ARM Financial Group, Inc.
515 West Market Street
Louisville, Kentucky 40202-3271
Telecopier No.: (502) 582-7903
or to such other address as either party may have furnished to the other in
writing in accordance herewith. All notices shall be conclusively deemed to be
received and shall be effective, (i) upon receipt if hand delivered; (ii) if
sent by telecopy or facsimile transmission, upon confirmation of receipt by the
sender of such transmission; or (iii) if sent by registered or certified mail,
on the fifth day after the day on which such notice is mailed.
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B. SEVERABILITY. Each provision of this Agreement shall be interpreted
in such manner as to be effective and valid under applicable law, but if any
provision of this Agreement is held to be prohibited by or invalid under
applicable law, such provision will be ineffective only to the extent of such
prohibition or invalidity, without invalidating the remainder of such provision
or the remaining provisions of this Agreement.
C. ASSIGNMENT. The Company's rights and obligations under this
Agreement shall not be assignable by the Company except as incident to a
reorganization, merger or consolidation, or transfer of all or substantially all
of the Company's business and properties (or portion thereof in which the
Executive is employed). Neither this Agreement nor any rights hereunder shall be
assignable or otherwise subject to hypothecation by the Executive. Nothing
herein is intended to affect the provisions of Sections 4(A)(3) and 5.
D. ENTIRE AGREEMENT. Except as expressly set forth herein, this
Agreement represents the entire Agreement of the parties concerning the subject
matter hereof and shall supersede any and all previous contracts, arrangements
or understandings between the Company and the Executive, including, without
limitation, the 1996 Agreement. This Agreement may be amended at any time by
mutual written agreement of the parties hereto. The parties expressly disclaim
that there were any representations or other understandings made to the other as
an inducement to enter into this Agreement except those that appear within this
Agreement.
E. WITHHOLDING. The payment of any amount pursuant to this Agreement
shall be subject to applicable withholding and payroll taxes, and such other
deductions as may be required under the company's employee benefit plans, if
any.
F. GOVERNING LAW. This Agreement shall be governed by and in accordance
with the laws of the Commonwealth of Kentucky.
IN WITNESS WHEREOF, the Company has caused this Agreement to be duly
executed and the Executive has hereunto set his hand, as of the day and year
first above.
ARM FINANCIAL GROUP, INC.
By: /s/ Mark V. Kaminski
--------------------------------------
Name: Mark V. Kaminski
Title:
EXECUTIVE
By: /s/ Martin H. Ruby
--------------------------------------
Name: Martin H. Ruby
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Exhibit 10.33
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as
of the 1st day of March, 1999 (the "Effective Date"), by and between ARM
FINANCIAL GROUP, INC., a Delaware corporation with its principal place of
business in the Commonwealth of Kentucky (the "Company"), and Dennis L. Carr
("Executive").
WHEREAS the parties have executed an employment agreement dated
December 4, 1997, which has been amended from time to time (the "1997
Agreement") and which provides certain benefits in the event of a change in
control of the Company; and
WHEREAS the parties desire to terminate and replace the 1997 Agreement
with the present Agreement, and to restate the terms and conditions of
Executive's employment with the Company,
NOW, THEREFORE, in consideration of the mutual covenants hereinafter
set forth, the parties agree as follows:
1. EMPLOYMENT.
A. POSITION. The Company wishes to employ and the Executive hereby
accepts the position of Executive Vice President and Chief Actuary for the Term
(as defined in Section 2 below). Executive shall have such responsibilities and
powers normally associated with such office. Executive shall perform such other
duties as are commensurate with Executive's position, and as may be determined
by the Chief Executive Officer or the Board of Directors of the Company (the
"Board") from time to time.
B. EXECUTIVE'S COMMITMENT. Executive shall consider his employment by
the Company as his principal employment, shall devote the necessary time and
attention to his duties and responsibilities under this Agreement, and shall
perform them to the best of his abilities. While subject to any provisions of
this Agreement, Executive shall maintain loyalty to the Company, and shall take
no action which would directly or indirectly promote any competitor without the
approval of the Company, or injure any of the Company's interests. Subject to
the foregoing and Section 7 below, Executive may engage in other charitable,
civic, or business activities to the extent that they do not interfere with his
obligations under this Agreement, provided that Executive's participation in
those activities shall be subject to the Company's ongoing approval.
2. TERM OF EMPLOYMENT.
Unless terminated earlier as provided in Sections 4 and 5, the initial
term of Executive's employment shall be three years to commence with the
Effective Date (as it may be extended pursuant to the following sentence, the
"Term"). Commencing on the third anniversary date of this Agreement and on each
anniversary date thereafter the term of this Agreement shall be
<PAGE>
automatically extended for a period of one year, and shall continue in effect
from year-to-year, unless (i) either party gives written notice of its intent to
terminate this Agreement at least 180 days prior to an anniversary date (a
"Nonrenewal Notice"), or (ii) this Agreement is terminated as hereinafter set
forth in Sections 4 and 5.
3. COMPENSATION AND BENEFITS.
A. BASE SALARY. Commencing with the Effective Date, the Company shall
pay Executive a base salary of $230,000 per annum, payable in accordance with
the Company's prevailing payroll policies. The Compensation Committee of the
Board shall review the Executive's base salary no less frequently than annually,
and on the basis of such review, may increase (but not decrease) such base
salary (as it may be so increased, the "Base Salary").
B. BONUS. Executive is entitled to participate in a cash bonus plan on
the same basis as similarly situated executives as may be determined by the
Compensation Committee, in its sole discretion.
C. BENEFITS. The Executive shall, during his employment under this
Agreement, be included to the extent eligible thereunder in all employee benefit
plans, programs or arrangements (including, without limitation, any plans,
programs or arrangements providing for retirement benefits, incentive
compensation, profit sharing, bonuses, disability benefits, health, dental and
life insurance, or vacation and paid holidays) which shall be established by the
Company for, or made available to, similarly situated executives. The Company
shall indemnify Executive to the fullest extent permitted by Delaware law and
the Company's Certificate of Incorporation and ByLaws, and the Company shall
procure and maintain insurance policies, to the extent reasonably available, for
the benefit of its directors and officers, including Executive.
4. TERMINATION OF EMPLOYMENT.
A. TERMINATION WITHOUT CAUSE; FAILURE TO RENEW WITHOUT CAUSE;
RESIGNATION FOR GOOD REASON. If, during the Term, Executive's employment is
terminated without Cause, the Company delivers a Nonrenewal Notice without
Cause, or if Executive resigns from his employment for Good Reason, the Company
shall pay executive severance pay in an amount equal to two times the sum of:
(1) Executive's Base Salary and (2) the greater of (i) the percentage of
Executive's actual earnings used to calculate bonus paid to the Executive in the
year preceding termination of employment multiplied by Base Salary or (ii) the
average of bonuses paid Executive over the last three years preceding the
termination or resignation, (the "Severance Payment"). The Severance Payment
shall be paid over twenty-four months in such equal installments as are
consistent with the Company's prevailing payroll policies. The Severance Payment
is subject to Executive fulfilling certain stipulations set forth in Section
4(A) hereof. Executive shall also be entitled to receive a PRO RATA portion of
any bonus paid for the year of termination payable at such time as payments are
generally made under the bonus plan, such bonus shall equal the greater of (i)
the percentage of Executive's actual earnings used to calculate bonus paid to
the Executive in the year preceding termination of employment multiplied by Base
Salary or (ii) the average of bonuses paid Executive over the last three years
preceding the
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termination or resignation, multiplied by a fraction where the numerator is the
number of days during the year that Executive was employed by the Company and
the denominator is 365. Additionally, the Company shall continue to pay all (or
the applicable portion) of the premiums for such group insurance benefits (such
as health, life, and disability insurance policies) that covered Executive on
the day next preceding Executive's termination of employment for twenty-four
months following termination under this Section 4(A). Executive shall have no
further right to receive any other compensation or benefits after termination or
resignation except as may be provided by the terms of the Company's employee
benefit plans or programs.
1. RELEASE OF CLAIMS. To receive the severance benefits
described in this Section 4(A), Executive must execute in a form
reasonably suitable to the Company a release and waiver of all claims
Executive may have against the Company, or any of its subsidiaries,
parents, officers, directors, and agents arising out of Executive's
employment with the Company or the termination or resignation of
employment, including any claims for employment discrimination under
any and all statutes and regulations which prohibit employment
discrimination because of race, sex, national origin, color, age,
religion, disability, or veteran's status, including but not limited to
the Federal Age Discrimination in Employment Act.
2. FURTHER STIPULATIONS. The Company may not terminate any
severance payments and insurance premium payments due Executive under
this Section 4(A) prior to a ruling or order issued by an arbitration
panel or court of competent jurisdiction finding that the Executive has
materially breached Section 6 or 7 of this Agreement and that such a
remedy is equitable hereunder.
3. DEATH BEFORE SEVERANCE IS PAID. Any severance due Executive
at the time Executive dies shall be paid when due under Section 4(A) to
the beneficiary designated by the Executive in writing to receive these
funds, or if no beneficiary is designated, to the Executive's estate.
B. TERMINATION FOR CAUSE; FAILURE TO RENEW FOR CAUSE; RESIGNATION
WITHOUT GOOD REASON. If, during the Term, the Company terminates Executive's
employment for Cause or if Executive resigns without Good Reason, then Executive
shall be entitled to receive Base Salary through the date specified in the
notice of termination, or 10 business days after receipt by the Company of a
notice of resignation. Executive shall have no further rights to receive any
other form of compensation or benefits after such termination or resignation of
employment, except as determined in accordance with the terms of the Company's
employee benefit plans or programs.
1. CAUSE. Termination for Cause shall mean termination of
Executive's employment because of:
(i) any act or omission by Executive that constitutes a
material breach of this Agreement;
(ii) the continued failure or refusal of Executive to
perform the material duties required of him as an employee of
the Company (other than because of
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death or disability);
(iii) any willful material violation by the Executive of any
law or regulation applicable to the business of the Company or
its subsidiaries, or the Executive's conviction of a felony, or
any willful perpetration by the Executive of a common law fraud;
or
(iv) any willful misconduct by Executive which causes
material financial injury to the Company or materially harms its
business reputation, or otherwise is materially injurious to the
Company, its subsidiaries, or affiliates;
provided, however, that if any such Cause relates to Executive's obligations
under this Agreement and is (x) susceptible to cure and (y) does not constitute
a repetition of Cause, then the Company shall not terminate Executive's
employment hereunder unless the Company first gives Executive notice of its
intention to terminate and of the grounds for such termination, and Executive
has not, within 10 business days following receipt of the notice, cured such
Cause, or in the event such Cause is not susceptible to cure within such 10
business day period, Executive has not taken all reasonable steps within such 10
business day period to cure such Cause as promptly as practicable thereafter;
and provided further that no action or omission shall be deemed to be Cause if
taken in reliance upon the clear directive of the Company's Chief Executive
Officer or Board of Directors.
2. GOOD REASON. Resignation with Good Reason, for purposes of
this Agreement, shall mean any of the following (without Executive's
written consent):
(i) a reduction in Executive's Base Salary or a failure
by the Company to pay material compensation when due in
connection with Executive's employment;
(ii) material diminution of authority, responsibilities
or positions of Executive;
(iii) the failure of a successor to the Company to
assume and agree to and abide by the terms and condition of
this Agreement; or
(iv) the failure to fully compensate Executive for any
increase in Executive's cost of living associated with the
Company's relocation of Executive's place of employment,
including without limitation, costs associated directly with
such relocation, housing costs, and any differences in the
appropriate cost of living indices;
provided, however, that if any such Good Reason is (x) susceptible to cure and
(y) does not constitute a repetition of Good Reason, then Executive shall not
terminate his employment hereunder unless Executive first gives the Company
notice of his intention to terminate and of the grounds for such termination,
and the Company has not, within 10 business days following receipt of the
notice, cured such Good Reason, or in the event such Good Reason is not
susceptible to
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cure within such 10 business day period, the Company has not taken all
reasonable steps within such 10 business day period to cure such Good Reason as
promptly as practicable thereafter.
C. CHANGE OF CONTROL. In the event of a Change of Control (as defined
below), the Executive may terminate his employment and this Agreement upon 30
days' written notice to the Company during the 30-day period following the
18-month period after the occurrence of the Change of Control (or such shorter
period to the extent the acquiring company does not request the services of the
Executive for such 18-month period). In the event of such a termination by
Executive, Executive shall be entitled to receive all of the benefits described
in Section 4(A) above (subject to compliance with the conditions set forth
therein). For purposes of this Agreement, a "Change of Control" shall have the
meaning ascribed thereto in the Company's 1997 Equity Incentive Plan in its form
on the effective date of this Agreement.
5. DEATH OR DISABILITY.
In the event of the termination of Executive's employment by reason of
death or Permanent Disability (as herein defined) the Executive (or his estate,
if applicable) shall be entitled to compensation and benefits under Section 3
through the date of termination, which is the date of death or the date
Executive commences to receive permanent disability benefits under the Company's
disability insurance program. Executive shall also be entitled to receive a PRO
RATA portion of any bonus paid for the year of termination payable at such time
as payments are generally made under the bonus plan and subject to the
attainment of the performance goals thereunder. The Executive (or his estate or
guardian) shall have no further right to receive any other compensation or
benefits after such termination except as may be determined in accordance with
the terms of the Company's employee benefit plans or programs. For purposes of
this agreement, "permanent disability" means a physical or mental disability or
infirmity of the Executive which prevents the normal performance of
substantially all of his duties as an employee of the Company, which disability
or infirmity shall exist, or in the opinion of an independent physician is
reasonably likely to exist, for any continuous period of 180 days or days
aggregating 180 days in any one year period.
6. CONFIDENTIALITY.
A. CONFIDENTIAL INFORMATION. "Confidential Information" means
information in whatever form, including information that is written,
electronically stored, orally transmitted, or memorized, which has a commercial
value to the Company and which is created, discovered, developed, or otherwise
becomes known to the Company, or in which property rights are held, assigned to
or otherwise acquired by or conveyed to the Company, including any system,
method, technique, research and development, technology, software, technical
information, trade secret, trademark, copyrighted material, reports, records,
documentation, data, customer or supplier lists, tax or financial information
(including the revenues, profits, and costs associated with any of the Company's
products or services), business or marketing plans, strategy, pricing
information or forecasts. Confidential Information does not include information
which becomes generally known within the Company's industry through no act or
omission by Executive.
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B. OWNERSHIP; DISCLOSURE. Any Confidential Information, whether or not
developed by Executive, shall at all times be the Company's exclusive property.
Executive shall, upon termination of employment, return the original and any
copy of Confidential Information to the Company.
C. RESTRICTION. During the term of this Agreement, and at any time
thereafter Executive shall not without the Company's prior written consent
specifically referring to this covenant,
(1) use any Confidential Information for the benefit of
himself or any other party other than the Company or disclose it to any
other person or entity;
(2) remove Confidential Information or documentation, device,
plan, or other records pertaining to Company's business from the
Company's premises, except when specifically authorized to do so in
pursuit of the Company's business; or
(3) retain copies or other records of any such items.
D. PURPOSE. The parties acknowledge and agree that the Confidential
Information is a valuable business asset, and this section is necessary to
protect the Company's legitimate business interests.
7. COVENANT NOT TO COMPETE/NON-SOLICITATION.
A. COVENANT. During the time of his employment and for a period of two
years following termination of employment, subject to the last sentence of this
Section 7(A), the Executive shall not, without prior written consent of the
Company, which in its exclusive discretion it may withhold, directly or
indirectly, for any reason:
(1) engage in, assist, or have any interest in, including
without limitation as a principal, consultant, employee, owner,
shareholder, director, officer, partner, member, advisor, agent or
financier, any activity which is in competition with the Company where
the Company does business; provided, this subsection shall not prohibit
investment by the Executive not exceeding five percent (5%) of the
outstanding securities of a publicly traded company so long as he does
not serve as an employee, director or consultant with respect to any
activities of such corporation which are in competition with the
Company where the Company does business;
(2) directly or indirectly influence any of the Company's
employees, officers, agents, or consultants to terminate their
employment or relationship with the Company or accept employment or a
business relationship with any of the Company's competitors;
(3) interfere with or solicit for any purpose contrary to the
best interests of the Company any of the Company' s contracts or
business relationships, including without limitation those with
customers, suppliers, consultants, attorneys, or other agents, whether
evidenced by written or oral agreement; or
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(4) at no time during or after termination of employment shall
Executive or the Company utter, issue or circulate any false,
inappropriate or disparaging statements, remarks or rumors about each
other unless giving truthful testimony under subpoena.
Notwithstanding the foregoing, Section 7(A)(1) shall not apply following the
Company's termination of Executive's employment without Cause, the Executive's
resignation with Good Reason, either party's non-renewal by delivery of a
Nonrenewal Notice, or in any event after a Change in Control. For purposes of
Sections 6 and 7 of this Agreement, the "Company" shall mean the Company
together with its subsidiaries.
B. EXTENSION OF RESTRICTED PERIOD. The period of applicability of
Section 7(A) shall be extended an additional day for each day on which Executive
is in breach of Section 7(A).
8. REMEDIES.
A. IRREPARABLE HARM. The parties acknowledge and agree that irreparable
harm would result in the event of a threatened or actual material breach by
either party of Section 6 or 7 of this Agreement. Therefore, in such an event,
and notwithstanding any other provision of this Agreement,
(1) The non-breaching party shall be entitled to a restraining
order, order of specific performance, or other injunctive relief,
without showing actual damage and without bond or other security;
(2) The Company's obligation in making payment or providing
any benefit under this Agreement, including without limitation any
severance benefits, shall immediately cease upon the Company's
obtaining an order or ruling described in Section 4(A)(2) of this
Agreement.
(3) If the Executive breaches Section 7 of this Agreement the
parties agree that the Company may seek relief in any court having
jurisdiction of the dispute and shall be entitled to an injunction to
enforce Section 7 for a period of two (2) years following the
Executive's last breach.
B. REMEDIES NOT EXCLUSIVE. Neither party's remedies hereunder are
exclusive, they shall not prejudice or prohibit any other rights or remedies
under this Agreement or otherwise. To the extent required to be enforced by
applicable law, the cessation of the Company's obligations to make payments and
continue benefits under this Agreement shall deemed to be in the nature of
liquidated damages and not a penalty. If for any reason, it is held that the
restrictions under Section 6 or 7 are not reasonable or that consideration
therefor is inadequate, such restrictions shall be interpreted or modified to
include as much of the duration and scope identified in Section 6 or 7 as will
render such restrictions valid and enforceable.
9. ADDITIONAL PAYMENT.
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A. GROSS-UP PAYMENT. Notwithstanding anything herein to the contrary,
if it is determined that any Payment (as defined below) would be subject to the
excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as
amended (the "Code") or any interest or penalties with respect to such excise
tax (such excise tax, together with any interest or penalties thereon, is herein
referred to as an "Excise Tax"), then Executive shall be entitled to an
additional payment (a "Gross-Up Payment") in an amount that will place Executive
in the same after-tax economic position that Executive would have enjoyed if the
Excise Tax had not applied to the Payment. The amount of the Gross-Up Payment
shall be determined by the Accounting Firm (as defined below) in accordance with
the formula {(E x (1 - M)/(1 - T)) - E} (or such other formula as the Accounting
Firm deems appropriate which is intended to achieve the same result), where
E equals the Payments which are determined to be "excess
parachute payments" within the meaning of Section 280G(b)(1) of the
Code;
M equals the sum of the highest marginal rates(1) for
Taxes (as defined below) applicable to Executive at the time of the
Payment; and
T equals M plus the rate of Excise Tax applicable to the
Payment.
No Gross-Up Payments shall be payable hereunder if the Accounting Firm
determines that the Payments are not subject to an Excise Tax.
B. DETERMINATION OF GROSS-UP PAYMENT. Subject to the provisions of
Section 9(C), all determinations required under this Section 9, including
whether a Gross-Up Payment is required, the amount of the Payments constituting
excess parachute payments, and the amount of the Gross-Up Payment, shall be made
by the Accounting Firm, which shall provide detailed supporting calculations to
both Executive and the Company within fifteen days of the Change in Control
Date, Executive's Date of Termination or any other date reasonably requested by
Executive or the Company on which a determination under this Section 9 is
necessary or advisable. The Company shall pay to Executive the initial Gross-Up
Payment within 5 days of the receipt by Executive and the Company of the
Accounting Firm's determination. If the Accounting Firm determines that no
Excise Tax is payable by Executive, the Company shall cause the Accounting Firm
to provide Executive with an opinion that the Accounting Firm has substantial
authority under the Code and Regulations not to report an Excise Tax on
Executive federal income tax return. Any determination by the Accounting Firm
shall be binding upon Executive and the Company. If the initial Gross-Up Payment
is insufficient to cover the amount of the Excise Tax that is ultimately
determined to be owing by Executive with respect to any Payment (hereinafter an
"Underpayment"), the Company, after exhausting its remedies under Section 9(C)
below, shall promptly pay to Executive an additional Gross-Up Payment in respect
of the Underpayment.
C. PROCEDURES. Executive shall notify the Company in writing of any
claim by the
- --------
(1) To be expressed in up to three decimal places. For example, a combined
federal, state and local marginal rate of 56% would be expressed as .56
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Internal Revenue Service that, if successful, would require the payment by the
Company of a Gross-Up Payment. Such notice shall be given as soon as practicable
after Executive knows of such claim and shall apprise the Company of the nature
of the claim and the date on which the claim is requested to be paid. Executive
agrees not to pay the claim until the expiration of the thirty-day period
following the date on which Executive notifies the Company, or such shorter
period ending on the date the Taxes with respect to such claim are due (the
"Notice Period"). If the Company notifies Executive in writing prior to the
expiration of the Notice Period that it desires to contest the claim, Executive
shall: (i) give the Company any information reasonably requested by the Company
relating to the claim; (ii) take such action in connection with the claim as the
Company may reasonably request, including, without limitation, accepting legal
representation with respect to such claim by an attorney reasonably selected by
the Company and reasonably acceptable to Executive; (iii) cooperate with the
Company in good faith in contesting the claim; and (iv) permit the Company to
participate in any proceedings relating to the claim. Executive shall permit the
Company to control all proceedings related to the claim and, at its option,
permit the Company to pursue or forgo any and all administrative appeals,
proceedings, hearings, and conferences with the taxing authority in respect of
such claim. If requested by the Company, Executive agrees either to pay the tax
claimed and sue for a refund or contest the claim in any permissible manner and
to prosecute such contest to a determination before any administrative tribunal,
in a court of initial jurisdiction and in one or more appellate courts as the
Company shall determine; PROVIDED, HOWEVER, that, if the Company directs
Executive to pay such claim and pursue a refund, the Company shall advance the
amount of such payment to Executive on an after-tax and interest-free basis (the
"Advance"). The Company's control of the contest related to the claim shall be
limited to the issues related to the Gross-Up Payment and Executive shall be
entitled to settle or contest, as the case may be, any other issues raised by
the Internal Revenue Service or other taxing authority. If the Company does not
notify Executive in writing prior to the end of the Notice Period of its desire
to contest the claim, the Company shall pay to Executive an additional Gross-Up
Payment in respect of the excess parachute payments that are the subject of the
claim, and Executive agrees to pay the amount of the Excise Tax that is the
subject of the claim to the applicable taxing authority in accordance with
applicable law.
D. REPAYMENTS. If, after receipt by Executive of an Advance, Executive
becomes entitled to a refund with respect to the claim to which such Advance
relates, Executive shall pay the Company the amount of the refund (together with
any interest paid or credited thereon after Taxes applicable thereto). If, after
receipt by Executive of an Advance, a determination is made that Executive shall
not be entitled to any refund with respect to the claim and the Company does not
promptly notify Executive of its intent to contest the denial of refund, then
the amount of the Advance shall not be required to be repaid by Executive and
the amount thereof shall offset the amount of the additional Gross-Up Payment
then owing to Executive.
E. FURTHER ASSURANCES. The Company shall indemnify Executive and hold
Executive harmless, on an after-tax basis, from any costs, expenses, penalties,
fines, interest or other liabilities ("Losses") incurred by Executive with
respect to the exercise by the Company of any of its rights under this Section
9, including, without limitation, any Losses related to the Company's decision
to contest a claim or any imputed income to Executive resulting from any Advance
or action taken on Executive's behalf by the Company hereunder. The Company
shall pay all
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reasonable legal fees and expenses incurred under this Section 9, and shall
promptly reimburse Executive for the reasonable expenses incurred by Executive
in connection with any actions taken by the Company or required to be taken by
Executive hereunder. The Company shall also pay all of the fees and expenses of
the Accounting Firm, including, without limitation, the fees and expenses
related to the opinion referred to in Section 9(B).
F. DEFINITIONS. "ACCOUNTING FIRM" shall mean Ernst & Young or, if such
firm is unable or unwilling to perform such calculations, such other national
accounting firm as shall be designated by agreement between Executive and the
Company.
"CHANGE IN CONTROL DATE" shall mean the date on which the Change in
Control occurs.
"EQUITY PLANS" means the Company's Amended and Restated Stock Option
Plan, the Company's 1997 Equity Incentive Plan, as each may be amended from time
to time and any successor plans.
"PAYMENT" means (i) any amount due or paid to Executive under this
Agreement, (ii) any amount that is due or paid to Executive under any plan,
program or arrangement of the Company and its subsidiaries (including, without
limitation, the Equity Plans) and (iii) any amount or benefit that is due or
payable to Executive under this Agreement or under any plan, program or
arrangement of the Company and its subsidiaries not otherwise covered under
clause (i) or (ii) hereof which must reasonably be taken into account under
Section 280G of the Code and the Regulations in determining the amount the
"parachute payments" received by Executive, including, without limitation, any
amounts which must be taken into account under the Code and Regulations as a
result of (A) the acceleration of the vesting of any option, restricted stock or
other equity award granted under the Equity Plans or otherwise, (B) the
acceleration of the time at which any payment or benefit is receivable by
Executive or (C) any contingent severance or other amounts that are payable to
Executive.
"REGULATIONS" shall mean the proposed, temporary and regulations under
Section 280G of the Code or any successor provision thereto.
"TAXES" shall mean the federal, state and local income taxes to which
Executive is subject at the time of determination, calculated on the basis of
the highest marginal rates then in effect, plus any additional payroll or
withholding taxes to which Executive is then subject.
G. ALTERNATIVE TO THE GROSS-UP PAYMENT. Notwithstanding anything to the
contrary in this Agreement, Executive hereby agrees that the Payments to be made
to Executive shall be reduced (and no Gross-up Payment will be paid to
Executive) so that none of the Payments constitute "parachute payments" within
the meaning of Section 280G(b)(2) of the Code, if, and only if, the Accounting
Firm determines that such reduction would result in the aggregate after excise
tax (but before income tax) value of the Payments so reduced being no more than
$20,000 less than the after excise tax (but before income tax) value of the sum
of the Payments and the relevant Gross-up Payment (assuming that the Payments
had not been reduced and a Gross-up Payment was paid to Executive).
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10. ARBITRATION.
A. Any dispute or controversy arising under or in connection with this
Agreement and any claim by Executive that the Company breached any statutory or
common law duty to Executive (including but not limited to the law of tort,
contract, and all federal, state or local laws prohibiting employment
discrimination because of race, color, religion, sex, national origin, age,
veteran's status, or disability) that cannot be mutually resolved by the parties
hereto shall be settled exclusively by arbitration in Louisville, Kentucky
before one arbitrator of exemplary qualifications and stature, who shall be
selected jointly by the Company and the Executive, or, if the Company and the
Executive cannot agree on the selection of the arbitrator, shall be selected by
the American Arbitration Association (provided that any arbitrator selected by
the American Arbitration Association shall not, without the consent of the
parties hereto, be affiliated with the Company or the Executive or any of their
respective affiliates). Judgment may be entered on the arbitrator's award in any
court having jurisdiction. The parties hereby agree that the arbitrator shall be
empowered to enter an equitable decree mandating specific enforcement of the
terms of this Agreement, or in the event the arbitrator is resolving a dispute
over the breach of a statutory or common law duty, the parties agree that the
arbitrator shall be empowered to fashion a remedy that would have been available
had the matter been litigated in a judicial or administrative proceeding. The
Company shall bear all expenses of the arbitrator incurred in any arbitration or
any court costs incurred in any court proceeding hereunder and shall promptly
reimburse the Executive (within 30 days of invoice) for any related reasonable
legal fees and out-of-pocket expenses directly attributable to such arbitration
or any court proceeding related to this Agreement; provided that such legal fees
are calculated on an hourly, and not on a contingency fee, basis; and, that the
Executive shall bear all expenses of the arbitrator and all of his legal fees
and out-of-pocket expenses (and reimburse the Company for its portion of such
expenses) if the arbitrator or relevant trier-of-fact determines that the
Executive's claim or position was frivolous and without reasonable foundation.
B. The parties agree that this requirement to arbitrate shall not apply
to any suit by either party seeking an injunction and/or damages for violation
of Sections 6 and/or 7 of this Agreement, it being specifically understood that
such claims arising under Sections 6 or 7 may be enforced in the first instance
in any court having jurisdiction of the parties.
C. If either party appeals the decision of the arbitrator, each party
shall bear its own expenses until the outcome of such appeal has been
determined, whereupon the prevailing party's expenses, including reasonable
legal fees, shall be reimbursed promptly by the other party.
11. MISCELLANEOUS.
A. NOTICES. All notices or communications hereunder shall be in writing
addressed as follows:
To the Company:
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ARM Financial Group, Inc.
515 West Market Street
Louisville, Kentucky 40202-3271
Telecopier No.: (502) 582-7903
Attention: General Counsel
To the Executive:
ARM Financial Group, Inc.
515 West Market Street
Louisville, Kentucky 40202-3271
Telecopier No.: (502) 582-7903
or to such other address as either party may have furnished to the other in
writing in accordance herewith. All notices shall be conclusively deemed to be
received and shall be effective, (i) upon receipt if hand delivered; (ii) if
sent by telecopy or facsimile transmission, upon confirmation of receipt by the
sender of such transmission; or (iii) if sent by registered or certified mail,
on the fifth day after the day on which such notice is mailed.
B. SEVERABILITY. Each provision of this Agreement shall be interpreted
in such manner as to be effective and valid under applicable law, but if any
provision of this Agreement is held to be prohibited by or invalid under
applicable law, such provision will be ineffective only to the extent of such
prohibition or invalidity, without invalidating the remainder of such provision
or the remaining provisions of this Agreement.
C. ASSIGNMENT. The Company's rights and obligations under this
Agreement shall not be assignable by the Company except as incident to a
reorganization, merger or consolidation, or transfer of all or substantially all
of the Company's business and properties (or portion thereof in which the
Executive is employed). Neither this Agreement nor any rights hereunder shall be
assignable or otherwise subject to hypothecation by the Executive. Nothing
herein is intended to affect the provisions of Sections 4(A)(3) and 5.
D. ENTIRE AGREEMENT. Except as expressly set forth herein, this
Agreement represents the entire Agreement of the parties concerning the subject
matter hereof and shall supersede any and all previous contracts, arrangements
or understandings between the Company and the Executive, including, without
limitation, the 1997 Agreement. This Agreement may be amended at any time by
mutual written agreement of the parties hereto. The parties expressly disclaim
that there were any representations or other understandings made to the other as
an inducement to enter into this Agreement except those that appear within this
Agreement.
E. WITHHOLDING. The payment of any amount pursuant to this Agreement
shall be subject to applicable withholding and payroll taxes, and such other
deductions as may be required under the company's employee benefit plans, if
any.
F. GOVERNING LAW. This Agreement shall be governed by and in accordance
with the
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laws of the Commonwealth of Kentucky.
IN WITNESS WHEREOF, the Company has caused this Agreement to be duly
executed and the Executive has hereunto set his hand, as of the day and year
first above.
ARM FINANCIAL GROUP, INC.
By: /s/ Martin H. Ruby
-----------------------------------
Name:
-----------------------------------
Title:
EXECUTIVE
By: /s/ Dennis L. Carr
-----------------------------------
Name: Dennis L. Carr
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Exhibit 10.34
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as
of the 1st day of March, 1999 (the "Effective Date"), by and between ARM
FINANCIAL GROUP, INC., a Delaware corporation with its principal place of
business in the Commonwealth of Kentucky (the "Company"), and David E. Ferguson
("Executive").
WHEREAS the parties have executed an employment agreement dated July 1,
1996, which has been amended from time to time (the "1996 Agreement") and which
provides certain benefits in the event of a change in control of the Company;
and
WHEREAS the parties desire to terminate and replace the 1996 Agreement
with the present Agreement, and to restate the terms and conditions of
Executive's employment with the Company,
NOW, THEREFORE, in consideration of the mutual covenants hereinafter
set forth, the parties agree as follows:
1. EMPLOYMENT.
A. POSITION. The Company wishes to employ and the Executive hereby
accepts the position of President-ARM Technology Group for the Term (as defined
in Section 2 below). Executive shall have such responsibilities and powers
normally associated with such office. Executive shall perform such other duties
as are commensurate with Executive's position, and as may be determined by the
Chief Executive Officer or the Board of Directors of the Company (the "Board")
from time to time.
B. EXECUTIVE'S COMMITMENT. Executive shall consider his employment by
the Company as his principal employment, shall devote the necessary time and
attention to his duties and responsibilities under this Agreement, and shall
perform them to the best of his abilities. While subject to any provisions of
this Agreement, Executive shall maintain loyalty to the Company, and shall take
no action which would directly or indirectly promote any competitor without the
approval of the Company, or injure any of the Company's interests. Subject to
the foregoing and Section 7 below, Executive may engage in other charitable,
civic, or business activities to the extent that they do not interfere with his
obligations under this Agreement, provided that Executive's participation in
those activities shall be subject to the Company's ongoing approval.
2. TERM OF EMPLOYMENT.
Unless terminated earlier as provided in Sections 4 and 5, the initial
term of Executive's employment shall be three years to commence with the
Effective Date (as it may be extended pursuant to the following sentence, the
"Term"). Commencing on the third anniversary date of this Agreement and on each
anniversary date thereafter the term of this Agreement shall be
<PAGE>
automatically extended for a period of one year, and shall continue in effect
from year-to-year, unless (i) either party gives written notice of its intent to
terminate this Agreement at least 180 days prior to an anniversary date (a
"Nonrenewal Notice"), or (ii) this Agreement is terminated as hereinafter set
forth in Sections 4 and 5.
3. COMPENSATION AND BENEFITS.
A. BASE SALARY. Commencing with the Effective Date, the Company shall
pay Executive a base salary of $330,000 per annum, payable in accordance with
the Company's prevailing payroll policies. The Compensation Committee of the
Board shall review the Executive's base salary no less frequently than annually,
and on the basis of such review, may increase (but not decrease) such base
salary (as it may be so increased, the "Base Salary").
B. BONUS. Executive is entitled to participate in a cash bonus plan on
the same basis as similarly situated executives as may be determined by the
Compensation Committee, in its sole discretion.
C. BENEFITS. The Executive shall, during his employment under this
Agreement, be included to the extent eligible thereunder in all employee benefit
plans, programs or arrangements (including, without limitation, any plans,
programs or arrangements providing for retirement benefits, incentive
compensation, profit sharing, bonuses, disability benefits, health, dental and
life insurance, or vacation and paid holidays) which shall be established by the
Company for, or made available to, similarly situated executives. The Company
shall indemnify Executive to the fullest extent permitted by Delaware law and
the Company's Certificate of Incorporation and ByLaws, and the Company shall
procure and maintain insurance policies, to the extent reasonably available, for
the benefit of its directors and officers, including Executive.
4. TERMINATION OF EMPLOYMENT.
A. TERMINATION WITHOUT CAUSE; FAILURE TO RENEW WITHOUT CAUSE;
RESIGNATION FOR GOOD REASON. If, during the Term, Executive's employment is
terminated without Cause, the Company delivers a Nonrenewal Notice without
Cause, or if Executive resigns from his employment for Good Reason, the Company
shall pay executive severance pay in an amount equal to two times the sum of:
(1) Executive's Base Salary and (2) the greater of (i) the percentage of
Executive's actual earnings used to calculate bonus paid to the Executive in the
year preceding termination of employment multiplied by Base Salary or (ii) the
average of bonuses paid Executive over the last three years preceding the
termination or resignation, (the "Severance Payment"). The Severance Payment
shall be paid over twenty-four months in such equal installments as are
consistent with the Company's prevailing payroll policies. The Severance Payment
is subject to Executive fulfilling certain stipulations set forth in Section
4(A) hereof. Executive shall also be entitled to receive a PRO RATA portion of
any bonus paid for the year of termination payable at such time as payments are
generally made under the bonus plan, such bonus shall equal the greater of (i)
the percentage of Executive's actual earnings used to calculate bonus paid to
the Executive in the year preceding termination of employment multiplied by Base
Salary or (ii) the average of bonuses paid Executive over the last three years
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preceding the termination or resignation, multiplied by a fraction where the
numerator is the number of days during the year that Executive was employed by
the Company and the denominator is 365. Additionally, the Company shall continue
to pay all (or the applicable portion) of the premiums for such group insurance
benefits (such as health, life, and disability insurance policies) that covered
Executive on the day next preceding Executive's termination of employment for
twenty-four months following termination under this Section 4(A). Executive
shall have no further right to receive any other compensation or benefits after
termination or resignation except as may be provided by the terms of the
Company's employee benefit plans or programs.
1. RELEASE OF CLAIMS. To receive the severance benefits
described in this Section 4(A), Executive must execute in a form
reasonably suitable to the Company a release and waiver of all claims
Executive may have against the Company, or any of its subsidiaries,
parents, officers, directors, and agents arising out of Executive's
employment with the Company or the termination or resignation of
employment, including any claims for employment discrimination under
any and all statutes and regulations which prohibit employment
discrimination because of race, sex, national origin, color, age,
religion, disability, or veteran's status, including but not limited to
the Federal Age Discrimination in Employment Act.
2. FURTHER STIPULATIONS. The Company may not terminate any
severance payments and insurance premium payments due Executive under
this Section 4(A) prior to a ruling or order issued by an arbitration
panel or court of competent jurisdiction finding that the Executive has
materially breached Section 6 or 7 of this Agreement and that such a
remedy is equitable hereunder.
3. DEATH BEFORE SEVERANCE IS PAID. Any severance due Executive
at the time Executive dies shall be paid when due under Section 4(A) to
the beneficiary designated by the Executive in writing to receive these
funds, or if no beneficiary is designated, to the Executive's estate.
B. TERMINATION FOR CAUSE; FAILURE TO RENEW FOR CAUSE; RESIGNATION
WITHOUT GOOD REASON. If, during the Term, the Company terminates Executive's
employment for Cause or if Executive resigns without Good Reason, then Executive
shall be entitled to receive Base Salary through the date specified in the
notice of termination, or 10 business days after receipt by the Company of a
notice of resignation. Executive shall have no further rights to receive any
other form of compensation or benefits after such termination or resignation of
employment, except as determined in accordance with the terms of the Company's
employee benefit plans or programs.
1. CAUSE. Termination for Cause shall mean termination of
Executive's employment because of:
(i) any act or omission by Executive that constitutes a
material breach of this Agreement;
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(ii) the continued failure or refusal of Executive to
perform the material duties required of him as an employee
of the Company (other than because of death or disability);
(iii) any willful material violation by the Executive
of any law or regulation applicable to the business of the
Company or its subsidiaries, or the Executive's conviction
of a felony, or any willful perpetration by the Executive of
a common law fraud; or
(iv) any willful misconduct by Executive which causes
material financial injury to the Company or materially harms
its business reputation, or otherwise is materially
injurious to the Company, its subsidiaries, or affiliates;
provided, however, that if any such Cause relates to Executive's obligations
under this Agreement and is (x) susceptible to cure and (y) does not constitute
a repetition of Cause, then the Company shall not terminate Executive's
employment hereunder unless the Company first gives Executive notice of its
intention to terminate and of the grounds for such termination, and Executive
has not, within 10 business days following receipt of the notice, cured such
Cause, or in the event such Cause is not susceptible to cure within such 10
business day period, Executive has not taken all reasonable steps within such 10
business day period to cure such Cause as promptly as practicable thereafter;
and provided further that no action or omission shall be deemed to be Cause if
taken in reliance upon the clear directive of the Company's Chief Executive
Officer or Board of Directors.
2. GOOD REASON. Resignation with Good Reason, for purposes of
this Agreement, shall mean any of the following (without Executive's
written consent):
(i) a reduction in Executive's Base Salary or a failure
by the Company to pay material compensation when due in
connection with Executive's employment;
(ii) material diminution of authority, responsibilities
or positions of Executive;
(iii) the failure of a successor to the Company to
assume and agree to and abide by the terms and condition of
this Agreement; or
(iv) the failure to fully compensate Executive for any
increase in Executive's cost of living associated with the
Company's relocation of Executive's place of employment,
including without limitation, costs associated directly with
such relocation, housing costs, and any differences in the
appropriate cost of living indices;
provided, however, that if any such Good Reason is (x) susceptible to
cure and (y) does not constitute a repetition of Good Reason, then
Executive shall not terminate his
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employment hereunder unless Executive first gives the Company notice
of his intention to terminate and of the grounds for such termination,
and the Company has not, within 10 business days following receipt of
the notice, cured such Good Reason, or in the event such Good Reason
is not susceptible to cure within such 10 business day period, the
Company has not taken all reasonable steps within such 10 business day
period to cure such Good Reason as promptly as practicable thereafter.
C. CHANGE OF CONTROL. In the event of a Change of Control (as defined
below), the Executive may terminate his employment and this Agreement upon 30
days' written notice to the Company during the 30-day period following the
18-month period after the occurrence of the Change of Control (or such shorter
period to the extent the acquiring company does not request the services of the
Executive for such 18-month period). In the event of such a termination by
Executive, Executive shall be entitled to receive all of the benefits described
in Section 4(A) above (subject to compliance with the conditions set forth
therein). For purposes of this Agreement, a "Change of Control" shall have the
meaning ascribed thereto in the Company's 1997 Equity Incentive Plan in its form
on the effective date of this Agreement.
5. DEATH OR DISABILITY.
In the event of the termination of Executive's employment by reason of
death or Permanent Disability (as herein defined) the Executive (or his estate,
if applicable) shall be entitled to compensation and benefits under Section 3
through the date of termination, which is the date of death or the date
Executive commences to receive permanent disability benefits under the Company's
disability insurance program. Executive shall also be entitled to receive a PRO
RATA portion of any bonus paid for the year of termination payable at such time
as payments are generally made under the bonus plan and subject to the
attainment of the performance goals thereunder. The Executive (or his estate or
guardian) shall have no further right to receive any other compensation or
benefits after such termination except as may be determined in accordance with
the terms of the Company's employee benefit plans or programs. For purposes of
this agreement, "permanent disability" means a physical or mental disability or
infirmity of the Executive which prevents the normal performance of
substantially all of his duties as an employee of the Company, which disability
or infirmity shall exist, or in the opinion of an independent physician is
reasonably likely to exist, for any continuous period of 180 days or days
aggregating 180 days in any one year period.
6. CONFIDENTIALITY.
A. CONFIDENTIAL INFORMATION. "Confidential Information" means
information in whatever form, including information that is written,
electronically stored, orally transmitted, or memorized, which has a commercial
value to the Company and which is created, discovered, developed, or otherwise
becomes known to the Company, or in which property rights are held, assigned to
or otherwise acquired by or conveyed to the Company, including any system,
method, technique, research and development, technology, software, technical
information, trade secret, trademark, copyrighted material, reports, records,
documentation, data, customer or supplier lists, tax or financial information
(including the revenues, profits, and costs associated
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with any of the Company's products or services), business or marketing plans,
strategy, pricing information or forecasts. Confidential Information does not
include information which becomes generally known within the Company's industry
through no act or omission by Executive.
B. OWNERSHIP; DISCLOSURE. Any Confidential Information, whether or not
developed by Executive, shall at all times be the Company's exclusive property.
Executive shall, upon termination of employment, return the original and any
copy of Confidential Information to the Company.
C. RESTRICTION. During the term of this Agreement, and at any time
thereafter Executive shall not without the Company's prior written consent
specifically referring to this covenant,
(1) use any Confidential Information for the benefit of
himself or any other party other than the Company or disclose it to any
other person or entity;
(2) remove Confidential Information or documentation, device,
plan, or other records pertaining to Company's business from the
Company's premises, except when specifically authorized to do so in
pursuit of the Company's business; or
(3) retain copies or other records of any such items.
D. PURPOSE. The parties acknowledge and agree that the Confidential
Information is a valuable business asset, and this section is necessary to
protect the Company's legitimate business interests.
7. COVENANT NOT TO COMPETE/NON-SOLICITATION.
A. COVENANT. During the time of his employment and for a period of two
years following termination of employment, subject to the last sentence of this
Section 7(A), the Executive shall not, without prior written consent of the
Company, which in its exclusive discretion it may withhold, directly or
indirectly, for any reason:
(1) engage in, assist, or have any interest in, including
without limitation as a principal, consultant, employee, owner,
shareholder, director, officer, partner, member, advisor, agent or
financier, any activity which is in competition with the Company where
the Company does business; provided, this subsection shall not prohibit
investment by the Executive not exceeding five percent (5%) of the
outstanding securities of a publicly traded company so long as he does
not serve as an employee, director or consultant with respect to any
activities of such corporation which are in competition with the
Company where the Company does business;
(2) directly or indirectly influence any of the Company's
employees, officers, agents, or consultants to terminate their
employment or relationship with the Company or accept employment or a
business relationship with any of the Company's competitors;
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(3) interfere with or solicit for any purpose contrary to the
best interests of the Company any of the Company' s contracts or
business relationships, including without limitation those with
customers, suppliers, consultants, attorneys, or other agents, whether
evidenced by written or oral agreement; or
(4) at no time during or after termination of employment shall
Executive or the Company utter, issue or circulate any false,
inappropriate or disparaging statements, remarks or rumors about each
other unless giving truthful testimony under subpoena.
Notwithstanding the foregoing, Section 7(A)(1) shall not apply following the
Company's termination of Executive's employment without Cause, the Executive's
resignation with Good Reason, either party's non-renewal by delivery of a
Nonrenewal Notice, or in any event after a Change in Control. For purposes of
Sections 6 and 7 of this Agreement, the "Company" shall mean the Company
together with its subsidiaries.
B. EXTENSION OF RESTRICTED PERIOD. The period of applicability of
Section 7(A) shall be extended an additional day for each day on which Executive
is in breach of Section 7(A).
8. REMEDIES.
A. IRREPARABLE HARM. The parties acknowledge and agree that irreparable
harm would result in the event of a threatened or actual material breach by
either party of Section 6 or 7 of this Agreement. Therefore, in such an event,
and notwithstanding any other provision of this Agreement,
(1) The non-breaching party shall be entitled to a restraining
order, order of specific performance, or other injunctive relief,
without showing actual damage and without bond or other security;
(2) The Company's obligation in making payment or providing
any benefit under this Agreement, including without limitation any
severance benefits, shall immediately cease upon the Company's
obtaining an order or ruling described in Section 4(A)(2) of this
Agreement.
(3) If the Executive breaches Section 7 of this Agreement the
parties agree that the Company may seek relief in any court having
jurisdiction of the dispute and shall be entitled to an injunction to
enforce Section 7 for a period of two (2) years following the
Executive's last breach.
B. REMEDIES NOT EXCLUSIVE. Neither party's remedies hereunder are
exclusive, they shall not prejudice or prohibit any other rights or remedies
under this Agreement or otherwise. To the extent required to be enforced by
applicable law, the cessation of the Company's obligations to make payments and
continue benefits under this Agreement shall deemed to be in the nature of
liquidated damages and not a penalty. If for any reason, it is held that the
restrictions under Section 6 or 7 are not reasonable or that consideration
therefor is inadequate,
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such restrictions shall be interpreted or modified to include as much of the
duration and scope identified in Section 6 or 7 as will render such restrictions
valid and enforceable.
9. ADDITIONAL PAYMENT.
A. GROSS-UP PAYMENT. Notwithstanding anything herein to the contrary,
if it is determined that any Payment (as defined below) would be subject to the
excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as
amended (the "Code") or any interest or penalties with respect to such excise
tax (such excise tax, together with any interest or penalties thereon, is herein
referred to as an "Excise Tax"), then Executive shall be entitled to an
additional payment (a "Gross-Up Payment") in an amount that will place Executive
in the same after-tax economic position that Executive would have enjoyed if the
Excise Tax had not applied to the Payment. The amount of the Gross-Up Payment
shall be determined by the Accounting Firm (as defined below) in accordance with
the formula {(E x (1 - M)/(1 - T)) - E} (or such other formula as the Accounting
Firm deems appropriate which is intended to achieve the same result), where
E equals the Payments which are determined to be "excess
parachute payments" within the meaning of Section 280G(b)(1) of the
Code;
M equals the sum of the highest marginal rates(1) for
Taxes (as defined below) applicable to Executive at the time of the Payment;
and
- ----------
(1) To be expressed in up to three decimal places. For example, a combined
federal, state and local marginal rate of 56% would be expressed as .560
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T equals M plus the rate of Excise Tax applicable to the
Payment.
No Gross-Up Payments shall be payable hereunder if the Accounting Firm
determines that the Payments are not subject to an Excise Tax.
B. DETERMINATION OF GROSS-UP PAYMENT. Subject to the provisions of
Section 9(C), all determinations required under this Section 9, including
whether a Gross-Up Payment is required, the amount of the Payments constituting
excess parachute payments, and the amount of the Gross-Up Payment, shall be made
by the Accounting Firm, which shall provide detailed supporting calculations to
both Executive and the Company within fifteen days of the Change in Control
Date, Executive's Date of Termination or any other date reasonably requested by
Executive or the Company on which a determination under this Section 9 is
necessary or advisable. The Company shall pay to Executive the initial Gross-Up
Payment within 5 days of the receipt by Executive and the Company of the
Accounting Firm's determination. If the Accounting Firm determines that no
Excise Tax is payable by Executive, the Company shall cause the Accounting Firm
to provide Executive with an opinion that the Accounting Firm has substantial
authority under the Code and Regulations not to report an Excise Tax on
Executive federal income tax return. Any determination by the Accounting Firm
shall be binding upon Executive and the Company. If the initial Gross-Up Payment
is insufficient to cover the amount of the Excise Tax that is ultimately
determined to be owing by Executive with respect to any Payment (hereinafter an
"Underpayment"), the Company, after exhausting its remedies under Section 9(C)
below, shall promptly pay to Executive an additional Gross-Up Payment in respect
of the Underpayment.
C. PROCEDURES. Executive shall notify the Company in writing of any
claim by the Internal Revenue Service that, if successful, would require the
payment by the Company of a Gross-Up Payment. Such notice shall be given as soon
as practicable after Executive knows of such claim and shall apprise the Company
of the nature of the claim and the date on which the claim is requested to be
paid. Executive agrees not to pay the claim until the expiration of the
thirty-day period following the date on which Executive notifies the Company, or
such shorter period ending on the date the Taxes with respect to such claim are
due (the "Notice Period"). If the Company notifies Executive in writing prior to
the expiration of the Notice Period that it desires to contest the claim,
Executive shall: (i) give the Company any information reasonably requested by
the Company relating to the claim; (ii) take such action in connection with the
claim as the Company may reasonably request, including, without limitation,
accepting legal representation with respect to such claim by an attorney
reasonably selected by the Company and reasonably acceptable to Executive; (iii)
cooperate with the Company in good faith in contesting the claim; and (iv)
permit the Company to participate in any proceedings relating to the claim.
Executive shall permit the Company to control all proceedings related to the
claim and, at its option, permit the Company to pursue or forgo any and all
administrative appeals, proceedings, hearings, and conferences with the taxing
authority in respect of such claim. If requested by the Company, Executive
agrees either to pay the tax claimed and sue for a refund or contest the claim
in any permissible manner and to prosecute such contest to a determination
before any administrative tribunal, in a court of initial jurisdiction and in
one or more appellate courts as the Company shall determine; PROVIDED, HOWEVER,
that, if the Company directs Executive to pay such
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claim and pursue a refund, the Company shall advance the amount of such payment
to Executive on an after-tax and interest-free basis (the "Advance"). The
Company's control of the contest related to the claim shall be limited to the
issues related to the Gross-Up Payment and Executive shall be entitled to settle
or contest, as the case may be, any other issues raised by the Internal Revenue
Service or other taxing authority. If the Company does not notify Executive in
writing prior to the end of the Notice Period of its desire to contest the
claim, the Company shall pay to Executive an additional Gross-Up Payment in
respect of the excess parachute payments that are the subject of the claim, and
Executive agrees to pay the amount of the Excise Tax that is the subject of the
claim to the applicable taxing authority in accordance with applicable law.
D. REPAYMENTS. If, after receipt by Executive of an Advance, Executive
becomes entitled to a refund with respect to the claim to which such Advance
relates, Executive shall pay the Company the amount of the refund (together with
any interest paid or credited thereon after Taxes applicable thereto). If, after
receipt by Executive of an Advance, a determination is made that Executive shall
not be entitled to any refund with respect to the claim and the Company does not
promptly notify Executive of its intent to contest the denial of refund, then
the amount of the Advance shall not be required to be repaid by Executive and
the amount thereof shall offset the amount of the additional Gross-Up Payment
then owing to Executive.
E. FURTHER ASSURANCES. The Company shall indemnify Executive and hold
Executive harmless, on an after-tax basis, from any costs, expenses, penalties,
fines, interest or other liabilities ("Losses") incurred by Executive with
respect to the exercise by the Company of any of its rights under this Section
9, including, without limitation, any Losses related to the Company's decision
to contest a claim or any imputed income to Executive resulting from any Advance
or action taken on Executive's behalf by the Company hereunder. The Company
shall pay all reasonable legal fees and expenses incurred under this Section 9,
and shall promptly reimburse Executive for the reasonable expenses incurred by
Executive in connection with any actions taken by the Company or required to be
taken by Executive hereunder. The Company shall also pay all of the fees and
expenses of the Accounting Firm, including, without limitation, the fees and
expenses related to the opinion referred to in Section 9(B).
F. DEFINITIONS. "ACCOUNTING FIRM" shall mean Ernst & Young or, if such
firm is unable or unwilling to perform such calculations, such other national
accounting firm as shall be designated by agreement between Executive and the
Company.
"CHANGE IN CONTROL DATE" shall mean the date on which the Change in
Control occurs.
"EQUITY PLANS" means the Company's Amended and Restated Stock Option
Plan, the Company's 1997 Equity Incentive Plan, as each may be amended from time
to time and any successor plans.
"PAYMENT" means (i) any amount due or paid to Executive under this
Agreement, (ii) any amount that is due or paid to Executive under any plan,
program or arrangement of the Company and its subsidiaries (including, without
limitation, the Equity Plans) and (iii) any amount or benefit that is due or
payable to Executive under this Agreement or under any plan, program or
arrangement of the Company and its subsidiaries not otherwise covered under
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clause (i) or (ii) hereof which must reasonably be taken into account under
Section 280G of the Code and the Regulations in determining the amount the
"parachute payments" received by Executive, including, without limitation, any
amounts which must be taken into account under the Code and Regulations as a
result of (A) the acceleration of the vesting of any option, restricted stock or
other equity award granted under the Equity Plans or otherwise, (B) the
acceleration of the time at which any payment or benefit is receivable by
Executive or (C) any contingent severance or other amounts that are payable to
Executive.
"REGULATIONS" shall mean the proposed, temporary and regulations under
Section 280G of the Code or any successor provision thereto.
"TAXES" shall mean the federal, state and local income taxes to which
Executive is subject at the time of determination, calculated on the basis of
the highest marginal rates then in effect, plus any additional payroll or
withholding taxes to which Executive is then subject.
G. ALTERNATIVE TO THE GROSS-UP PAYMENT. Notwithstanding anything to the
contrary in this Agreement, Executive hereby agrees that the Payments to be made
to Executive shall be reduced (and no Gross-up Payment will be paid to
Executive) so that none of the Payments constitute "parachute payments" within
the meaning of Section 280G(b)(2) of the Code, if, and only if, the Accounting
Firm determines that such reduction would result in the aggregate after excise
tax (but before income tax) value of the Payments so reduced being no more than
$20,000 less than the after excise tax (but before income tax) value of the sum
of the Payments and the relevant Gross-up Payment (assuming that the Payments
had not been reduced and a Gross-up Payment was paid to Executive).
10. ARBITRATION.
A. Any dispute or controversy arising under or in connection with this
Agreement and any claim by Executive that the Company breached any statutory or
common law duty to Executive (including but not limited to the law of tort,
contract, and all federal, state or local laws prohibiting employment
discrimination because of race, color, religion, sex, national origin, age,
veteran's status, or disability) that cannot be mutually resolved by the parties
hereto shall be settled exclusively by arbitration in Louisville, Kentucky
before one arbitrator of exemplary qualifications and stature, who shall be
selected jointly by the Company and the Executive, or, if the Company and the
Executive cannot agree on the selection of the arbitrator, shall be selected by
the American Arbitration Association (provided that any arbitrator selected by
the American Arbitration Association shall not, without the consent of the
parties hereto, be affiliated with the Company or the Executive or any of their
respective affiliates). Judgment may be entered on the arbitrator's award in any
court having jurisdiction. The parties hereby agree that the arbitrator shall be
empowered to enter an equitable decree mandating specific enforcement of the
terms of this Agreement, or in the event the arbitrator is resolving a dispute
over the breach of a statutory or common law duty, the parties agree that the
arbitrator shall be empowered to fashion a remedy that would have been available
had the matter been litigated in a judicial or administrative proceeding. The
Company shall bear all expenses of the arbitrator incurred in any arbitration or
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any court costs incurred in any court proceeding hereunder and shall promptly
reimburse the Executive (within 30 days of invoice) for any related reasonable
legal fees and out-of-pocket expenses directly attributable to such arbitration
or any court proceeding related to this Agreement; provided that such legal fees
are calculated on an hourly, and not on a contingency fee, basis; and, that the
Executive shall bear all expenses of the arbitrator and all of his legal fees
and out-of-pocket expenses (and reimburse the Company for its portion of such
expenses) if the arbitrator or relevant trier-of-fact determines that the
Executive's claim or position was frivolous and without reasonable foundation.
B. The parties agree that this requirement to arbitrate shall not apply
to any suit by either party seeking an injunction and/or damages for violation
of Sections 6 and/or 7 of this Agreement, it being specifically understood that
such claims arising under Sections 6 or 7 may be enforced in the first instance
in any court having jurisdiction of the parties.
C. If either party appeals the decision of the arbitrator, each party
shall bear its own expenses until the outcome of such appeal has been
determined, whereupon the prevailing party's expenses, including reasonable
legal fees, shall be reimbursed promptly by the other party.
11. MISCELLANEOUS.
A. NOTICES. All notices or communications hereunder shall be in writing
addressed as follows:
To the Company:
ARM Financial Group, Inc.
515 West Market Street
Louisville, Kentucky 40202-3271
Telecopier No.: (502) 582-7903
Attention: General Counsel
To the Executive:
ARM Financial Group, Inc.
515 West Market Street
Louisville, Kentucky 40202-3271
Telecopier No.: (502) 582-7903
or to such other address as either party may have furnished to the other in
writing in accordance herewith. All notices shall be conclusively deemed to be
received and shall be effective, (i) upon receipt if hand delivered; (ii) if
sent by telecopy or facsimile transmission, upon confirmation of receipt by the
sender of such transmission; or (iii) if sent by registered or certified mail,
on the fifth day after the day on which such notice is mailed.
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B. SEVERABILITY. Each provision of this Agreement shall be interpreted
in such manner as to be effective and valid under applicable law, but if any
provision of this Agreement is held to be prohibited by or invalid under
applicable law, such provision will be ineffective only to the extent of such
prohibition or invalidity, without invalidating the remainder of such provision
or the remaining provisions of this Agreement.
C. ASSIGNMENT. The Company's rights and obligations under this
Agreement shall not be assignable by the Company except as incident to a
reorganization, merger or consolidation, or transfer of all or substantially all
of the Company's business and properties (or portion thereof in which the
Executive is employed). Neither this Agreement nor any rights hereunder shall be
assignable or otherwise subject to hypothecation by the Executive. Nothing
herein is intended to affect the provisions of Sections 4(A)(3) and 5.
D. ENTIRE AGREEMENT. Except as expressly set forth herein, this
Agreement represents the entire Agreement of the parties concerning the subject
matter hereof and shall supersede any and all previous contracts, arrangements
or understandings between the Company and the Executive, including, without
limitation, the 1996 Agreement. This Agreement may be amended at any time by
mutual written agreement of the parties hereto. The parties expressly disclaim
that there were any representations or other understandings made to the other as
an inducement to enter into this Agreement except those that appear within this
Agreement.
E. WITHHOLDING. The payment of any amount pursuant to this Agreement
shall be subject to applicable withholding and payroll taxes, and such other
deductions as may be required under the company's employee benefit plans, if
any.
F. GOVERNING LAW. This Agreement shall be governed by and in accordance
with the laws of the Commonwealth of Kentucky.
IN WITNESS WHEREOF, the Company has caused this Agreement to be duly
executed and the Executive has hereunto set his hand, as of the day and year
first above.
ARM FINANCIAL GROUP, INC.
By: /s/ Martin H. Ruby
----------------------------------
Name:
----------------------------------
Title:
EXECUTIVE
By: /s/ David E. Ferguson
----------------------------------
Name: David E. Ferguson
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Exhibit 10.35
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as
of the 1st day of March, 1999 (the "Effective Date"), by and between ARM
FINANCIAL GROUP, INC., a Delaware corporation with its principal place of
business in the Commonwealth of Kentucky (the "Company"), and John R. Lindholm
("Executive").
WHEREAS the parties have executed an employment agreement dated July 1,
1996, which has been amended from time to time (the "1996 Agreement") and which
provides certain benefits in the event of a change in control of the Company;
and
WHEREAS the parties desire to terminate and replace the 1996 Agreement
with the present Agreement, and to restate the terms and conditions of
Executive's employment with the Company,
NOW, THEREFORE, in consideration of the mutual covenants hereinafter
set forth, the parties agree as follows:
1. EMPLOYMENT.
A. POSITION. The Company wishes to employ and the Executive hereby
accepts the position of President-Retail Business Division for the Term (as
defined in Section 2 below). Executive shall have such responsibilities and
powers normally associated with such office. Executive shall perform such other
duties as are commensurate with Executive's position, and as may be determined
by the Chief Executive Officer or the Board of Directors of the Company (the
"Board") from time to time.
B. EXECUTIVE'S COMMITMENT. Executive shall consider his employment by
the Company as his principal employment, shall devote the necessary time and
attention to his duties and responsibilities under this Agreement, and shall
perform them to the best of his abilities. While subject to any provisions of
this Agreement, Executive shall maintain loyalty to the Company, and shall take
no action which would directly or indirectly promote any competitor without the
approval of the Company, or injure any of the Company's interests. Subject to
the foregoing and Section 7 below, Executive may engage in other charitable,
civic, or business activities to the extent that they do not interfere with his
obligations under this Agreement, provided that Executive's participation in
those activities shall be subject to the Company's ongoing approval.
2. TERM OF EMPLOYMENT.
Unless terminated earlier as provided in Sections 4 and 5, the initial
term of Executive's employment shall be three years to commence with the
Effective Date (as it may be extended pursuant to the following sentence, the
"Term"). Commencing on the third anniversary date of this Agreement and on each
anniversary date thereafter the term of this Agreement shall be
<PAGE>
automatically extended for a period of one year, and shall continue in effect
from year-to-year, unless (i) either party gives written notice of its intent to
terminate this Agreement at least 180 days prior to an anniversary date (a
"Nonrenewal Notice"), or (ii) this Agreement is terminated as hereinafter set
forth in Sections 4 and 5.
3. COMPENSATION AND BENEFITS.
A. BASE SALARY. Commencing with the Effective Date, the Company shall
pay Executive a base salary of $330,000 per annum, payable in accordance with
the Company's prevailing payroll policies. The Compensation Committee of the
Board shall review the Executive's base salary no less frequently than annually,
and on the basis of such review, may increase (but not decrease) such base
salary (as it may be so increased, the "Base Salary").
B. BONUS. Executive is entitled to participate in a cash bonus plan on
the same basis as similarly situated executives as may be determined by the
Compensation Committee, in its sole discretion.
C. BENEFITS. The Executive shall, during his employment under this
Agreement, be included to the extent eligible thereunder in all employee benefit
plans, programs or arrangements (including, without limitation, any plans,
programs or arrangements providing for retirement benefits, incentive
compensation, profit sharing, bonuses, disability benefits, health, dental and
life insurance, or vacation and paid holidays) which shall be established by the
Company for, or made available to, similarly situated executives. The Company
shall indemnify Executive to the fullest extent permitted by Delaware law and
the Company's Certificate of Incorporation and ByLaws, and the Company shall
procure and maintain insurance policies, to the extent reasonably available, for
the benefit of its directors and officers, including Executive.
4. TERMINATION OF EMPLOYMENT.
A. TERMINATION WITHOUT CAUSE; FAILURE TO RENEW WITHOUT CAUSE;
RESIGNATION FOR GOOD REASON. If, during the Term, Executive's employment is
terminated without Cause, the Company delivers a Nonrenewal Notice without
Cause, or if Executive resigns from his employment for Good Reason, the Company
shall pay executive severance pay in an amount equal to two times the sum of:
(1) Executive's Base Salary and (2) the greater of (i) the percentage of
Executive's actual earnings used to calculate bonus paid to the Executive in the
year preceding termination of employment multiplied by Base Salary or (ii) the
average of bonuses paid Executive over the last three years preceding the
termination or resignation, (the "Severance Payment"). The Severance Payment
shall be paid over twenty-four months in such equal installments as are
consistent with the Company's prevailing payroll policies. The Severance Payment
is subject to Executive fulfilling certain stipulations set forth in Section
4(A) hereof. Executive shall also be entitled to receive a PRO RATA portion of
any bonus paid for the year of termination payable at such time as payments are
generally made under the bonus plan, such bonus shall equal the greater of (i)
the percentage of Executive's actual earnings used to calculate bonus paid to
the Executive in the year preceding termination of employment multiplied by Base
Salary or (ii) the average of bonuses paid Executive over the last three years
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preceding the termination or resignation, multiplied by a fraction where the
numerator is the number of days during the year that Executive was employed by
the Company and the denominator is 365. Additionally, the Company shall continue
to pay all (or the applicable portion) of the premiums for such group insurance
benefits (such as health, life, and disability insurance policies) that covered
Executive on the day next preceding Executive's termination of employment for
twenty-four months following termination under this Section 4(A). Executive
shall have no further right to receive any other compensation or benefits after
termination or resignation except as may be provided by the terms of the
Company's employee benefit plans or programs.
1. RELEASE OF CLAIMS. To receive the severance benefits
described in this Section 4(A), Executive must execute in a form
reasonably suitable to the Company a release and waiver of all claims
Executive may have against the Company, or any of its subsidiaries,
parents, officers, directors, and agents arising out of Executive's
employment with the Company or the termination or resignation of
employment, including any claims for employment discrimination under
any and all statutes and regulations which prohibit employment
discrimination because of race, sex, national origin, color, age,
religion, disability, or veteran's status, including but not limited to
the Federal Age Discrimination in Employment Act.
2. FURTHER STIPULATIONS. The Company may not terminate any
severance payments and insurance premium payments due Executive under
this Section 4(A) prior to a ruling or order issued by an arbitration
panel or court of competent jurisdiction finding that the Executive has
materially breached Section 6 or 7 of this Agreement and that such a
remedy is equitable hereunder.
3. DEATH BEFORE SEVERANCE IS PAID. Any severance due Executive
at the time Executive dies shall be paid when due under Section 4(A) to
the beneficiary designated by the Executive in writing to receive these
funds, or if no beneficiary is designated, to the Executive's estate.
B. TERMINATION FOR CAUSE; FAILURE TO RENEW FOR CAUSE; RESIGNATION
WITHOUT GOOD REASON. If, during the Term, the Company terminates Executive's
employment for Cause or if Executive resigns without Good Reason, then Executive
shall be entitled to receive Base Salary through the date specified in the
notice of termination, or 10 business days after receipt by the Company of a
notice of resignation. Executive shall have no further rights to receive any
other form of compensation or benefits after such termination or resignation of
employment, except as determined in accordance with the terms of the Company's
employee benefit plans or programs.
1. CAUSE. Termination for Cause shall mean termination of
Executive's employment because of:
(i) any act or omission by Executive that constitutes a
material breach of this Agreement;
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(ii) the continued failure or refusal of Executive to
perform the material duties required of him as an employee of
the Company (other than because of death or disability);
(iii) any willful material violation by the Executive
of any law or regulation applicable to the business of the
Company or its subsidiaries, or the Executive's conviction of
a felony, or any willful perpetration by the Executive of a
common law fraud; or
(iv) any willful misconduct by Executive which causes
material financial injury to the Company or materially harms
its business reputation, or otherwise is materially injurious
to the Company, its subsidiaries, or affiliates;
provided, however, that if any such Cause relates to Executive's obligations
under this Agreement and is (x) susceptible to cure and (y) does not constitute
a repetition of Cause, then the Company shall not terminate Executive's
employment hereunder unless the Company first gives Executive notice of its
intention to terminate and of the grounds for such termination, and Executive
has not, within 10 business days following receipt of the notice, cured such
Cause, or in the event such Cause is not susceptible to cure within such 10
business day period, Executive has not taken all reasonable steps within such 10
business day period to cure such Cause as promptly as practicable thereafter;
and provided further that no action or omission shall be deemed to be Cause if
taken in reliance upon the clear directive of the Company's Chief Executive
Officer or Board of Directors.
2. GOOD REASON. Resignation with Good Reason, for purposes of
this Agreement, shall mean any of the following (without Executive's
written consent):
(i) a reduction in Executive's Base Salary or a
failure by the Company to pay material compensation when due
in connection with Executive's employment;
(ii) material diminution of authority,
responsibilities or positions of Executive;
(iii) the failure of a successor to the Company to
assume and agree to and abide by the terms and condition of
this Agreement; or
(iv) the failure to fully compensate Executive for
any increase in Executive's cost of living associated with the
Company's relocation of Executive's place of employment,
including without limitation, costs associated directly with
such relocation, housing costs, and any differences in the
appropriate cost of living indices;
provided, however, that if any such Good Reason is (x) susceptible to cure and
(y) does not constitute a repetition of Good Reason, then Executive shall not
terminate his employment
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hereunder unless Executive first gives the Company notice of his intention to
terminate and of the grounds for such termination, and the Company has not,
within 10 business days following receipt of the notice, cured such Good Reason,
or in the event such Good Reason is not susceptible to cure within such 10
business day period, the Company has not taken all reasonable steps within such
10 business day period to cure such Good Reason as promptly as practicable
thereafter.
C. CHANGE OF CONTROL. In the event of a Change of Control (as defined
below), the Executive may terminate his employment and this Agreement upon 30
days' written notice to the Company during the 30-day period following the
18-month period after the occurrence of the Change of Control (or such shorter
period to the extent the acquiring company does not request the services of the
Executive for such 18-month period). In the event of such a termination by
Executive, Executive shall be entitled to receive all of the benefits described
in Section 4(A) above (subject to compliance with the conditions set forth
therein). For purposes of this Agreement, a "Change of Control" shall have the
meaning ascribed thereto in the Company's 1997 Equity Incentive Plan in its form
on the effective date of this Agreement.
5. DEATH OR DISABILITY.
In the event of the termination of Executive's employment by reason of
death or Permanent Disability (as herein defined) the Executive (or his estate,
if applicable) shall be entitled to compensation and benefits under Section 3
through the date of termination, which is the date of death or the date
Executive commences to receive permanent disability benefits under the Company's
disability insurance program. Executive shall also be entitled to receive a PRO
RATA portion of any bonus paid for the year of termination payable at such time
as payments are generally made under the bonus plan and subject to the
attainment of the performance goals thereunder. The Executive (or his estate or
guardian) shall have no further right to receive any other compensation or
benefits after such termination except as may be determined in accordance with
the terms of the Company's employee benefit plans or programs. For purposes of
this agreement, "permanent disability" means a physical or mental disability or
infirmity of the Executive which prevents the normal performance of
substantially all of his duties as an employee of the Company, which disability
or infirmity shall exist, or in the opinion of an independent physician is
reasonably likely to exist, for any continuous period of 180 days or days
aggregating 180 days in any one year period.
6. CONFIDENTIALITY.
A. CONFIDENTIAL INFORMATION. "Confidential Information" means
information in whatever form, including information that is written,
electronically stored, orally transmitted, or memorized, which has a commercial
value to the Company and which is created, discovered, developed, or otherwise
becomes known to the Company, or in which property rights are held, assigned to
or otherwise acquired by or conveyed to the Company, including any system,
method, technique, research and development, technology, software, technical
information, trade secret, trademark, copyrighted material, reports, records,
documentation, data, customer or supplier lists, tax or financial information
(including the revenues, profits, and costs associated
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with any of the Company's products or services), business or marketing plans,
strategy, pricing information or forecasts. Confidential Information does not
include information which becomes generally known within the Company's industry
through no act or omission by Executive.
B. OWNERSHIP; DISCLOSURE. Any Confidential Information, whether or not
developed by Executive, shall at all times be the Company's exclusive property.
Executive shall, upon termination of employment, return the original and any
copy of Confidential Information to the Company.
C. RESTRICTION. During the term of this Agreement, and at any time
thereafter Executive shall not without the Company's prior written consent
specifically referring to this covenant,
(1) use any Confidential Information for the benefit of
himself or any other party other than the Company or disclose it to any
other person or entity;
(2) remove Confidential Information or documentation, device,
plan, or other records pertaining to Company's business from the
Company's premises, except when specifically authorized to do so in
pursuit of the Company's business; or
(3) retain copies or other records of any such items.
D. PURPOSE. The parties acknowledge and agree that the Confidential
Information is a valuable business asset, and this section is necessary to
protect the Company's legitimate business interests.
7. COVENANT NOT TO COMPETE/NON-SOLICITATION.
A. COVENANT. During the time of his employment and for a period of two
years following termination of employment, subject to the last sentence of this
Section 7(A), the Executive shall not, without prior written consent of the
Company, which in its exclusive discretion it may withhold, directly or
indirectly, for any reason:
(1) engage in, assist, or have any interest in, including
without limitation as a principal, consultant, employee, owner,
shareholder, director, officer, partner, member, advisor, agent or
financier, any activity which is in competition with the Company where
the Company does business; provided, this subsection shall not prohibit
investment by the Executive not exceeding five percent (5%) of the
outstanding securities of a publicly traded company so long as he does
not serve as an employee, director or consultant with respect to any
activities of such corporation which are in competition with the
Company where the Company does business;
(2) directly or indirectly influence any of the Company's
employees, officers, agents, or consultants to terminate their
employment or relationship with the Company or accept employment or a
business relationship with any of the Company's competitors;
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(3) interfere with or solicit for any purpose contrary to the
best interests of the Company any of the Company' s contracts or
business relationships, including without limitation those with
customers, suppliers, consultants, attorneys, or other agents, whether
evidenced by written or oral agreement; or
(4) at no time during or after termination of employment shall
Executive or the Company utter, issue or circulate any false,
inappropriate or disparaging statements, remarks or rumors about each
other unless giving truthful testimony under subpoena.
Notwithstanding the foregoing, Section 7(A)(1) shall not apply following the
Company's termination of Executive's employment without Cause, the Executive's
resignation with Good Reason, either party's non-renewal by delivery of a
Nonrenewal Notice, or in any event after a Change in Control. For purposes of
Sections 6 and 7 of this Agreement, the "Company" shall mean the Company
together with its subsidiaries.
B. EXTENSION OF RESTRICTED PERIOD. The period of applicability of
Section 7(A) shall be extended an additional day for each day on which Executive
is in breach of Section 7(A).
8. REMEDIES.
A. IRREPARABLE HARM. The parties acknowledge and agree that irreparable
harm would result in the event of a threatened or actual material breach by
either party of Section 6 or 7 of this Agreement. Therefore, in such an event,
and notwithstanding any other provision of this Agreement,
(1) The non-breaching party shall be entitled to a restraining
order, order of specific performance, or other injunctive relief,
without showing actual damage and without bond or other security;
(2) The Company's obligation in making payment or providing
any benefit under this Agreement, including without limitation any
severance benefits, shall immediately cease upon the Company's
obtaining an order or ruling described in Section 4(A)(2) of this
Agreement.
(3) If the Executive breaches Section 7 of this Agreement the
parties agree that the Company may seek relief in any court having
jurisdiction of the dispute and shall be entitled to an injunction to
enforce Section 7 for a period of two (2) years following the
Executive's last breach.
B. REMEDIES NOT EXCLUSIVE. Neither party's remedies hereunder are
exclusive, they shall not prejudice or prohibit any other rights or remedies
under this Agreement or otherwise. To the extent required to be enforced by
applicable law, the cessation of the Company's obligations to make payments and
continue benefits under this Agreement shall deemed to be in the nature of
liquidated damages and not a penalty. If for any reason, it is held that the
restrictions under Section 6 or 7 are not reasonable or that consideration
therefor is inadequate,
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such restrictions shall be interpreted or modified to include as much of the
duration and scope identified in Section 6 or 7 as will render such restrictions
valid and enforceable.
9. ADDITIONAL PAYMENT.
A. GROSS-UP PAYMENT. Notwithstanding anything herein to the contrary,
if it is determined that any Payment (as defined below) would be subject to the
excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as
amended (the "Code") or any interest or penalties with respect to such excise
tax (such excise tax, together with any interest or penalties thereon, is herein
referred to as an "Excise Tax"), then Executive shall be entitled to an
additional payment (a "Gross-Up Payment") in an amount that will place Executive
in the same after-tax economic position that Executive would have enjoyed if the
Excise Tax had not applied to the Payment. The amount of the Gross-Up Payment
shall be determined by the Accounting Firm (as defined below) in accordance with
the formula {(E x (1 - M)/(1 - T)) - E} (or such other formula as the Accounting
Firm deems appropriate which is intended to achieve the same result), where
E equals the Payments which are determined to be "excess
parachute payments" within the meaning of Section 280G(b)(1) of the
Code;
M equals the sum of the highest marginal rates(1) for Taxes
(as defined below) applicable to Executive at the time of the Payment; and
- ------------------
(1)To be expressed in up to three decimal places. For example, a combined
federal, state and local marginal rate of 56% would be expressed as .560
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T equals M plus the rate of Excise Tax applicable to the
Payment.
No Gross-Up Payments shall be payable hereunder if the Accounting Firm
determines that the Payments are not subject to an Excise Tax.
B. DETERMINATION OF GROSS-UP PAYMENT. Subject to the provisions of
Section 9(C), all determinations required under this Section 9, including
whether a Gross-Up Payment is required, the amount of the Payments constituting
excess parachute payments, and the amount of the Gross-Up Payment, shall be made
by the Accounting Firm, which shall provide detailed supporting calculations to
both Executive and the Company within fifteen days of the Change in Control
Date, Executive's Date of Termination or any other date reasonably requested by
Executive or the Company on which a determination under this Section 9 is
necessary or advisable. The Company shall pay to Executive the initial Gross-Up
Payment within 5 days of the receipt by Executive and the Company of the
Accounting Firm's determination. If the Accounting Firm determines that no
Excise Tax is payable by Executive, the Company shall cause the Accounting Firm
to provide Executive with an opinion that the Accounting Firm has substantial
authority under the Code and Regulations not to report an Excise Tax on
Executive federal income tax return. Any determination by the Accounting Firm
shall be binding upon Executive and the Company. If the initial Gross-Up Payment
is insufficient to cover the amount of the Excise Tax that is ultimately
determined to be owing by Executive with respect to any Payment (hereinafter an
"Underpayment"), the Company, after exhausting its remedies under Section 9(C)
below, shall promptly pay to Executive an additional Gross-Up Payment in respect
of the Underpayment.
C. PROCEDURES. Executive shall notify the Company in writing of any
claim by the Internal Revenue Service that, if successful, would require the
payment by the Company of a Gross-Up Payment. Such notice shall be given as soon
as practicable after Executive knows of such claim and shall apprise the Company
of the nature of the claim and the date on which the claim is requested to be
paid. Executive agrees not to pay the claim until the expiration of the
thirty-day period following the date on which Executive notifies the Company, or
such shorter period ending on the date the Taxes with respect to such claim are
due (the "Notice Period"). If the Company notifies Executive in writing prior to
the expiration of the Notice Period that it desires to contest the claim,
Executive shall: (i) give the Company any information reasonably requested by
the Company relating to the claim; (ii) take such action in connection with the
claim as the Company may reasonably request, including, without limitation,
accepting legal representation with respect to such claim by an attorney
reasonably selected by the Company and reasonably acceptable to Executive; (iii)
cooperate with the Company in good faith in contesting the claim; and (iv)
permit the Company to participate in any proceedings relating to the claim.
Executive shall permit the Company to control all proceedings related to the
claim and, at its option, permit the Company to pursue or forgo any and all
administrative appeals, proceedings, hearings, and conferences with the taxing
authority in respect of such claim. If requested by the Company, Executive
agrees either to pay the tax claimed and sue for a refund or contest the claim
in any permissible manner and to prosecute such contest to a determination
before any administrative tribunal, in a court of initial jurisdiction and in
one or more appellate courts as the Company shall determine; PROVIDED, HOWEVER,
that, if the Company directs Executive to pay such
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claim and pursue a refund, the Company shall advance the amount of such payment
to Executive on an after-tax and interest-free basis (the "Advance"). The
Company's control of the contest related to the claim shall be limited to the
issues related to the Gross-Up Payment and Executive shall be entitled to settle
or contest, as the case may be, any other issues raised by the Internal Revenue
Service or other taxing authority. If the Company does not notify Executive in
writing prior to the end of the Notice Period of its desire to contest the
claim, the Company shall pay to Executive an additional Gross-Up Payment in
respect of the excess parachute payments that are the subject of the claim, and
Executive agrees to pay the amount of the Excise Tax that is the subject of the
claim to the applicable taxing authority in accordance with applicable law.
D. REPAYMENTS. If, after receipt by Executive of an Advance, Executive
becomes entitled to a refund with respect to the claim to which such Advance
relates, Executive shall pay the Company the amount of the refund (together with
any interest paid or credited thereon after Taxes applicable thereto). If, after
receipt by Executive of an Advance, a determination is made that Executive shall
not be entitled to any refund with respect to the claim and the Company does not
promptly notify Executive of its intent to contest the denial of refund, then
the amount of the Advance shall not be required to be repaid by Executive and
the amount thereof shall offset the amount of the additional Gross-Up Payment
then owing to Executive.
E. FURTHER ASSURANCES. The Company shall indemnify Executive and hold
Executive harmless, on an after-tax basis, from any costs, expenses, penalties,
fines, interest or other liabilities ("Losses") incurred by Executive with
respect to the exercise by the Company of any of its rights under this Section
9, including, without limitation, any Losses related to the Company's decision
to contest a claim or any imputed income to Executive resulting from any Advance
or action taken on Executive's behalf by the Company hereunder. The Company
shall pay all reasonable legal fees and expenses incurred under this Section 9,
and shall promptly reimburse Executive for the reasonable expenses incurred by
Executive in connection with any actions taken by the Company or required to be
taken by Executive hereunder. The Company shall also pay all of the fees and
expenses of the Accounting Firm, including, without limitation, the fees and
expenses related to the opinion referred to in Section 9(B).
F. DEFINITIONS. "ACCOUNTING FIRM" shall mean Ernst & Young or, if such
firm is unable or unwilling to perform such calculations, such other national
accounting firm as shall be designated by agreement between Executive and the
Company.
"CHANGE IN CONTROL DATE" shall mean the date on which the Change in
Control occurs.
"EQUITY PLANS" means the Company's Amended and Restated Stock Option
Plan, the Company's 1997 Equity Incentive Plan, as each may be amended from time
to time and any successor plans.
"PAYMENT" means (i) any amount due or paid to Executive under this
Agreement, (ii) any amount that is due or paid to Executive under any plan,
program or arrangement of the Company and its subsidiaries (including, without
limitation, the Equity Plans) and (iii) any amount or benefit that is due or
payable to Executive under this Agreement or under any plan, program or
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arrangement of the Company and its subsidiaries not otherwise covered under
clause (i) or (ii) hereof which must reasonably be taken into account under
Section 280G of the Code and the Regulations in determining the amount the
"parachute payments" received by Executive, including, without limitation, any
amounts which must be taken into account under the Code and Regulations as a
result of (A) the acceleration of the vesting of any option, restricted stock or
other equity award granted under the Equity Plans or otherwise, (B) the
acceleration of the time at which any payment or benefit is receivable by
Executive or (C) any contingent severance or other amounts that are payable to
Executive.
"REGULATIONS" shall mean the proposed, temporary and regulations under
Section 280G of the Code or any successor provision thereto.
"TAXES" shall mean the federal, state and local income taxes to which
Executive is subject at the time of determination, calculated on the basis of
the highest marginal rates then in effect, plus any additional payroll or
withholding taxes to which Executive is then subject.
G. ALTERNATIVE TO THE GROSS-UP PAYMENT. Notwithstanding anything to the
contrary in this Agreement, Executive hereby agrees that the Payments to be made
to Executive shall be reduced (and no Gross-up Payment will be paid to
Executive) so that none of the Payments constitute "parachute payments" within
the meaning of Section 280G(b)(2) of the Code, if, and only if, the Accounting
Firm determines that such reduction would result in the aggregate after excise
tax (but before income tax) value of the Payments so reduced being no more than
$20,000 less than the after excise tax (but before income tax) value of the sum
of the Payments and the relevant Gross-up Payment (assuming that the Payments
had not been reduced and a Gross-up Payment was paid to Executive).
10. ARBITRATION.
A. Any dispute or controversy arising under or in connection with this
Agreement and any claim by Executive that the Company breached any statutory or
common law duty to Executive (including but not limited to the law of tort,
contract, and all federal, state or local laws prohibiting employment
discrimination because of race, color, religion, sex, national origin, age,
veteran's status, or disability) that cannot be mutually resolved by the parties
hereto shall be settled exclusively by arbitration in Louisville, Kentucky
before one arbitrator of exemplary qualifications and stature, who shall be
selected jointly by the Company and the Executive, or, if the Company and the
Executive cannot agree on the selection of the arbitrator, shall be selected by
the American Arbitration Association (provided that any arbitrator selected by
the American Arbitration Association shall not, without the consent of the
parties hereto, be affiliated with the Company or the Executive or any of their
respective affiliates). Judgment may be entered on the arbitrator's award in any
court having jurisdiction. The parties hereby agree that the arbitrator shall be
empowered to enter an equitable decree mandating specific enforcement of the
terms of this Agreement, or in the event the arbitrator is resolving a dispute
over the breach of a statutory or common law duty, the parties agree that the
arbitrator shall be empowered to fashion a remedy that would have been available
had the matter been litigated in a judicial or administrative proceeding. The
Company shall bear all expenses of the arbitrator incurred in any arbitration or
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any court costs incurred in any court proceeding hereunder and shall promptly
reimburse the Executive (within 30 days of invoice) for any related reasonable
legal fees and out-of-pocket expenses directly attributable to such arbitration
or any court proceeding related to this Agreement; provided that such legal fees
are calculated on an hourly, and not on a contingency fee, basis; and, that the
Executive shall bear all expenses of the arbitrator and all of his legal fees
and out-of-pocket expenses (and reimburse the Company for its portion of such
expenses) if the arbitrator or relevant trier-of-fact determines that the
Executive's claim or position was frivolous and without reasonable foundation.
B. The parties agree that this requirement to arbitrate shall not apply
to any suit by either party seeking an injunction and/or damages for violation
of Sections 6 and/or 7 of this Agreement, it being specifically understood that
such claims arising under Sections 6 or 7 may be enforced in the first instance
in any court having jurisdiction of the parties.
C. If either party appeals the decision of the arbitrator, each party
shall bear its own expenses until the outcome of such appeal has been
determined, whereupon the prevailing party's expenses, including reasonable
legal fees, shall be reimbursed promptly by the other party.
11. MISCELLANEOUS.
A. NOTICES. All notices or communications hereunder shall be in
writing addressed as follows:
To the Company:
ARM Financial Group, Inc.
515 West Market Street
Louisville, Kentucky 40202-3271
Telecopier No.: (502) 582-7903
Attention: General Counsel
To the Executive:
ARM Financial Group, Inc.
515 West Market Street
Louisville, Kentucky 40202-3271
Telecopier No.: (502) 582-7903
or to such other address as either party may have furnished to the other in
writing in accordance herewith. All notices shall be conclusively deemed to be
received and shall be effective, (i) upon receipt if hand delivered; (ii) if
sent by telecopy or facsimile transmission, upon confirmation of receipt by the
sender of such transmission; or (iii) if sent by registered or certified mail,
on the fifth day after the day on which such notice is mailed.
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B. SEVERABILITY. Each provision of this Agreement shall be interpreted
in such manner as to be effective and valid under applicable law, but if any
provision of this Agreement is held to be prohibited by or invalid under
applicable law, such provision will be ineffective only to the extent of such
prohibition or invalidity, without invalidating the remainder of such provision
or the remaining provisions of this Agreement.
C. ASSIGNMENT. The Company's rights and obligations under this
Agreement shall not be assignable by the Company except as incident to a
reorganization, merger or consolidation, or transfer of all or substantially all
of the Company's business and properties (or portion thereof in which the
Executive is employed). Neither this Agreement nor any rights hereunder shall be
assignable or otherwise subject to hypothecation by the Executive. Nothing
herein is intended to affect the provisions of Sections 4(A)(3) and 5.
D. ENTIRE AGREEMENT. Except as expressly set forth herein, this
Agreement represents the entire Agreement of the parties concerning the subject
matter hereof and shall supersede any and all previous contracts, arrangements
or understandings between the Company and the Executive, including, without
limitation, the 1996 Agreement. This Agreement may be amended at any time by
mutual written agreement of the parties hereto. The parties expressly disclaim
that there were any representations or other understandings made to the other as
an inducement to enter into this Agreement except those that appear within this
Agreement.
E. WITHHOLDING. The payment of any amount pursuant to this Agreement
shall be subject to applicable withholding and payroll taxes, and such other
deductions as may be required under the company's employee benefit plans, if
any.
F. GOVERNING LAW. This Agreement shall be governed by and in accordance
with the laws of the Commonwealth of Kentucky.
IN WITNESS WHEREOF, the Company has caused this Agreement to be duly
executed and the Executive has hereunto set his hand, as of the day and year
first above.
ARM FINANCIAL GROUP, INC.
By: /s/ Martin H. Ruby
------------------------------------
Name:
------------------------------------
Title:
EXECUTIVE
By: /s/ John R. Lindholm
------------------------------------
Name: John R. Lindholm
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Exhibit 10.36
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as
of the 1st day of March, 1999 (the "Effective Date"), by and between ARM
FINANCIAL GROUP, INC., a Delaware corporation with its principal place of
business in the Commonwealth of Kentucky (the "Company"), and John R. McGeeney
("Executive").
WHEREAS the parties have executed an employment agreement dated
December 4, 1997, which has been amended from time to time (the "1997
Agreement") and which provides certain benefits in the event of a change in
control of the Company; and
WHEREAS the parties desire to terminate and replace the 1997 Agreement
with the present Agreement, and to restate the terms and conditions of
Executive's employment with the Company,
NOW, THEREFORE, in consideration of the mutual covenants hereinafter
set forth, the parties agree as follows:
1. EMPLOYMENT.
A. POSITION. The Company wishes to employ and the Executive hereby
accepts the position of Executive Vice President and General Counsel for the
Term (as defined in Section 2 below). Executive shall have such responsibilities
and powers normally associated with such office. Executive shall perform such
other duties as are commensurate with Executive's position, and as may be
determined by the Chief Executive Officer or the Board of Directors of the
Company (the "Board") from time to time.
B. EXECUTIVE'S COMMITMENT. Executive shall consider his employment by
the Company as his principal employment, shall devote the necessary time and
attention to his duties and responsibilities under this Agreement, and shall
perform them to the best of his abilities. While subject to any provisions of
this Agreement, Executive shall maintain loyalty to the Company, and shall take
no action which would directly or indirectly promote any competitor without the
approval of the Company, or injure any of the Company's interests. Subject to
the foregoing and Section 7 below, Executive may engage in other charitable,
civic, or business activities to the extent that they do not interfere with his
obligations under this Agreement, provided that Executive's participation in
those activities shall be subject to the Company's ongoing approval.
2. TERM OF EMPLOYMENT.
Unless terminated earlier as provided in Sections 4 and 5, the initial
term of Executive's employment shall be three years to commence with the
Effective Date (as it may be extended pursuant to the following sentence, the
"Term"). Commencing on the third anniversary date of this Agreement and on each
anniversary date thereafter the term of this Agreement shall be
<PAGE>
automatically extended for a period of one year, and shall continue in effect
from year-to-year, unless (i) either party gives written notice of its intent to
terminate this Agreement at least 180 days prior to an anniversary date (a
"Nonrenewal Notice"), or (ii) this Agreement is terminated as hereinafter set
forth in Sections 4 and 5.
3. COMPENSATION AND BENEFITS.
A. BASE SALARY. Commencing with the Effective Date, the Company shall
pay Executive a base salary of $200,000 per annum, payable in accordance with
the Company's prevailing payroll policies. The Compensation Committee of the
Board shall review the Executive's base salary no less frequently than annually,
and on the basis of such review, may increase (but not decrease) such base
salary (as it may be so increased, the "Base Salary").
B. BONUS. Executive is entitled to participate in a cash bonus plan on
the same basis as similarly situated executives as may be determined by the
Compensation Committee, in its sole discretion.
C. BENEFITS. The Executive shall, during his employment under this
Agreement, be included to the extent eligible thereunder in all employee benefit
plans, programs or arrangements (including, without limitation, any plans,
programs or arrangements providing for retirement benefits, incentive
compensation, profit sharing, bonuses, disability benefits, health, dental and
life insurance, or vacation and paid holidays) which shall be established by the
Company for, or made available to, similarly situated executives. The Company
shall indemnify Executive to the fullest extent permitted by Delaware law and
the Company's Certificate of Incorporation and ByLaws, and the Company shall
procure and maintain insurance policies, to the extent reasonably available, for
the benefit of its directors and officers, including Executive.
4. TERMINATION OF EMPLOYMENT.
A. TERMINATION WITHOUT CAUSE; FAILURE TO RENEW WITHOUT CAUSE;
RESIGNATION FOR GOOD REASON. If, during the Term, Executive's employment is
terminated without Cause, the Company delivers a Nonrenewal Notice without
Cause, or if Executive resigns from his employment for Good Reason, the Company
shall pay executive severance pay in an amount equal to two times the sum of:
(1) Executive's Base Salary and (2) the greater of (i) the percentage of
Executive's actual earnings used to calculate bonus paid to the Executive in the
year preceding termination of employment multiplied by Base Salary or (ii) the
average of bonuses paid Executive over the last three years preceding the
termination or resignation, (the "Severance Payment"). The Severance Payment
shall be paid over twenty-four months in such equal installments as are
consistent with the Company's prevailing payroll policies. The Severance Payment
is subject to Executive fulfilling certain stipulations set forth in Section
4(A) hereof. Executive shall also be entitled to receive a PRO RATA portion of
any bonus paid for the year of termination payable at such time as payments are
generally made under the bonus plan, such bonus shall equal the greater of (i)
the percentage of Executive's actual earnings used to calculate bonus paid to
the Executive in the year preceding termination of employment multiplied by Base
Salary or (ii) the average of bonuses paid Executive over the last three years
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preceding the termination or resignation, multiplied by a fraction where the
numerator is the number of days during the year that Executive was employed by
the Company and the denominator is 365. Additionally, the Company shall continue
to pay all (or the applicable portion) of the premiums for such group insurance
benefits (such as health, life, and disability insurance policies) that covered
Executive on the day next preceding Executive's termination of employment for
twenty-four months following termination under this Section 4(A). Executive
shall have no further right to receive any other compensation or benefits after
termination or resignation except as may be provided by the terms of the
Company's employee benefit plans or programs.
1. RELEASE OF CLAIMS. To receive the severance benefits
described in this Section 4(A), Executive must execute in a form
reasonably suitable to the Company a release and waiver of all claims
Executive may have against the Company, or any of its subsidiaries,
parents, officers, directors, and agents arising out of Executive's
employment with the Company or the termination or resignation of
employment, including any claims for employment discrimination under
any and all statutes and regulations which prohibit employment
discrimination because of race, sex, national origin, color, age,
religion, disability, or veteran's status, including but not limited to
the Federal Age Discrimination in Employment Act.
2. FURTHER STIPULATIONS. The Company may not terminate any
severance payments and insurance premium payments due Executive under
this Section 4(A) prior to a ruling or order issued by an arbitration
panel or court of competent jurisdiction finding that the Executive has
materially breached Section 6 or 7 of this Agreement and that such a
remedy is equitable hereunder.
3. DEATH BEFORE SEVERANCE IS PAID. Any severance due Executive
at the time Executive dies shall be paid when due under Section 4(A) to
the beneficiary designated by the Executive in writing to receive these
funds, or if no beneficiary is designated, to the Executive's estate.
B. TERMINATION FOR CAUSE; FAILURE TO RENEW FOR CAUSE; RESIGNATION
WITHOUT GOOD REASON. If, during the Term, the Company terminates Executive's
employment for Cause or if Executive resigns without Good Reason, then Executive
shall be entitled to receive Base Salary through the date specified in the
notice of termination, or 10 business days after receipt by the Company of a
notice of resignation. Executive shall have no further rights to receive any
other form of compensation or benefits after such termination or resignation of
employment, except as determined in accordance with the terms of the Company's
employee benefit plans or programs.
1. CAUSE. Termination for Cause shall mean termination of
Executive's employment because of:
(i) any act or omission by Executive that constitutes a material
breach of this Agreement;
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(ii) the continued failure or refusal of Executive to
perform the material duties required of him as an employee of
the Company (other than because of death or disability);
(iii) any willful material violation by the Executive
of any law or regulation applicable to the business of the
Company or its subsidiaries, or the Executive's conviction of
a felony, or any willful perpetration by the Executive of a
common law fraud; or
(iv) any willful misconduct by Executive which causes
material financial injury to the Company or materially harms
its business reputation, or otherwise is materially injurious
to the Company, its subsidiaries, or affiliates;
provided, however, that if any such Cause relates to Executive's obligations
under this Agreement and is (x) susceptible to cure and (y) does not constitute
a repetition of Cause, then the Company shall not terminate Executive's
employment hereunder unless the Company first gives Executive notice of its
intention to terminate and of the grounds for such termination, and Executive
has not, within 10 business days following receipt of the notice, cured such
Cause, or in the event such Cause is not susceptible to cure within such 10
business day period, Executive has not taken all reasonable steps within such 10
business day period to cure such Cause as promptly as practicable thereafter;
and provided further that no action or omission shall be deemed to be Cause if
taken in reliance upon the clear directive of the Company's Chief Executive
Officer or Board of Directors.
2. GOOD REASON. Resignation with Good Reason, for purposes of
this Agreement, shall mean any of the following (without Executive's
written consent):
(i) a reduction in Executive's Base Salary or a
failure by the Company to pay material compensation when due
in connection with Executive's employment;
(ii) material diminution of authority,
responsibilities or positions of Executive;
(iii) the failure of a successor to the Company to
assume and agree to and abide by the terms and condition of
this Agreement; or
(iv) the failure to fully compensate Executive for
any increase in Executive's cost of living associated with the
Company's relocation of Executive's place of employment,
including without limitation, costs associated directly with
such relocation, housing costs, and any differences in the
appropriate cost of living indices;
provided, however, that if any such Good Reason is (x) susceptible to cure and
(y) does not constitute a repetition of Good Reason, then Executive shall not
terminate his employment
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hereunder unless Executive first gives the Company notice of his intention to
terminate and of the grounds for such termination, and the Company has not,
within 10 business days following receipt of the notice, cured such Good Reason,
or in the event such Good Reason is not susceptible to cure within such 10
business day period, the Company has not taken all reasonable steps within such
10 business day period to cure such Good Reason as promptly as practicable
thereafter.
C. CHANGE OF CONTROL. In the event of a Change of Control (as defined
below), the Executive may terminate his employment and this Agreement upon 30
days' written notice to the Company during the 30-day period following the
18-month period after the occurrence of the Change of Control (or such shorter
period to the extent the acquiring company does not request the services of the
Executive for such 18-month period). In the event of such a termination by
Executive, Executive shall be entitled to receive all of the benefits described
in Section 4(A) above (subject to compliance with the conditions set forth
therein). For purposes of this Agreement, a "Change of Control" shall have the
meaning ascribed thereto in the Company's 1997 Equity Incentive Plan in its form
on the effective date of this Agreement.
5. DEATH OR DISABILITY.
In the event of the termination of Executive's employment by reason of
death or Permanent Disability (as herein defined) the Executive (or his estate,
if applicable) shall be entitled to compensation and benefits under Section 3
through the date of termination, which is the date of death or the date
Executive commences to receive permanent disability benefits under the Company's
disability insurance program. Executive shall also be entitled to receive a PRO
RATA portion of any bonus paid for the year of termination payable at such time
as payments are generally made under the bonus plan and subject to the
attainment of the performance goals thereunder. The Executive (or his estate or
guardian) shall have no further right to receive any other compensation or
benefits after such termination except as may be determined in accordance with
the terms of the Company's employee benefit plans or programs. For purposes of
this agreement, "permanent disability" means a physical or mental disability or
infirmity of the Executive which prevents the normal performance of
substantially all of his duties as an employee of the Company, which disability
or infirmity shall exist, or in the opinion of an independent physician is
reasonably likely to exist, for any continuous period of 180 days or days
aggregating 180 days in any one year period.
6. CONFIDENTIALITY.
A. CONFIDENTIAL INFORMATION. "Confidential Information" means
information in whatever form, including information that is written,
electronically stored, orally transmitted, or memorized, which has a commercial
value to the Company and which is created, discovered, developed, or otherwise
becomes known to the Company, or in which property rights are held, assigned to
or otherwise acquired by or conveyed to the Company, including any system,
method, technique, research and development, technology, software, technical
information, trade secret, trademark, copyrighted material, reports, records,
documentation, data, customer or supplier lists, tax or financial information
(including the revenues, profits, and costs associated
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with any of the Company's products or services), business or marketing plans,
strategy, pricing information or forecasts. Confidential Information does not
include information which becomes generally known within the Company's industry
through no act or omission by Executive.
B. OWNERSHIP; DISCLOSURE. Any Confidential Information, whether or not
developed by Executive, shall at all times be the Company's exclusive property.
Executive shall, upon termination of employment, return the original and any
copy of Confidential Information to the Company.
C. RESTRICTION. During the term of this Agreement, and at any time
thereafter Executive shall not without the Company's prior written consent
specifically referring to this covenant,
(1) use any Confidential Information for the benefit of
himself or any other party other than the Company or disclose it to any
other person or entity;
(2) remove Confidential Information or documentation, device,
plan, or other records pertaining to Company's business from the
Company's premises, except when specifically authorized to do so in
pursuit of the Company's business; or
(3) retain copies or other records of any such items.
D. PURPOSE. The parties acknowledge and agree that the Confidential
Information is a valuable business asset, and this section is necessary to
protect the Company's legitimate business interests.
7. COVENANT NOT TO COMPETE/NON-SOLICITATION.
A. COVENANT. During the time of his employment and for a period of two
years following termination of employment, subject to the last sentence of this
Section 7(A), the Executive shall not, without prior written consent of the
Company, which in its exclusive discretion it may withhold, directly or
indirectly, for any reason:
(1) engage in, assist, or have any interest in, including
without limitation as a principal, consultant, employee, owner,
shareholder, director, officer, partner, member, advisor, agent or
financier, any activity which is in competition with the Company where
the Company does business; provided, this subsection shall not prohibit
investment by the Executive not exceeding five percent (5%) of the
outstanding securities of a publicly traded company so long as he does
not serve as an employee, director or consultant with respect to any
activities of such corporation which are in competition with the
Company where the Company does business;
(2) directly or indirectly influence any of the Company's
employees, officers, agents, or consultants to terminate their
employment or relationship with the Company or accept employment or a
business relationship with any of the Company's competitors;
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(3) interfere with or solicit for any purpose contrary to the
best interests of the Company any of the Company' s contracts or
business relationships, including without limitation those with
customers, suppliers, consultants, attorneys, or other agents, whether
evidenced by written or oral agreement; or
(4) at no time during or after termination of employment shall
Executive or the Company utter, issue or circulate any false,
inappropriate or disparaging statements, remarks or rumors about each
other unless giving truthful testimony under subpoena.
Notwithstanding the foregoing, Section 7(A)(1) shall not apply following the
Company's termination of Executive's employment without Cause, the Executive's
resignation with Good Reason, either party's non-renewal by delivery of a
Nonrenewal Notice, or in any event after a Change in Control. For purposes of
Sections 6 and 7 of this Agreement, the "Company" shall mean the Company
together with its subsidiaries.
B. EXTENSION OF RESTRICTED PERIOD. The period of applicability of
Section 7(A) shall be extended an additional day for each day on which Executive
is in breach of Section 7(A).
8. REMEDIES.
A. IRREPARABLE HARM. The parties acknowledge and agree that
irreparable harm would result in the event of a threatened or actual material
breach by either party of Section 6 or 7 of this Agreement. Therefore, in such
an event, and notwithstanding any other provision of this Agreement,
(1) The non-breaching party shall be entitled to a restraining
order, order of specific performance, or other injunctive relief,
without showing actual damage and without bond or other security;
(2) The Company's obligation in making payment or providing
any benefit under this Agreement, including without limitation any
severance benefits, shall immediately cease upon the Company's
obtaining an order or ruling described in Section 4(A)(2) of this
Agreement.
(3) If the Executive breaches Section 7 of this Agreement the
parties agree that the Company may seek relief in any court having
jurisdiction of the dispute and shall be entitled to an injunction to
enforce Section 7 for a period of two (2) years following the
Executive's last breach.
B. REMEDIES NOT EXCLUSIVE. Neither party's remedies hereunder are
exclusive, they shall not prejudice or prohibit any other rights or remedies
under this Agreement or otherwise. To the extent required to be enforced by
applicable law, the cessation of the Company's obligations to make payments and
continue benefits under this Agreement shall deemed to be in the nature of
liquidated damages and not a penalty. If for any reason, it is held that the
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restrictions under Section 6 or 7 are not reasonable or that consideration
therefor is inadequate, such restrictions shall be interpreted or modified to
include as much of the duration and scope identified in Section 6 or 7 as will
render such restrictions valid and enforceable.
9. ADDITIONAL PAYMENT.
A. GROSS-UP PAYMENT. Notwithstanding anything herein to the contrary,
if it is determined that any Payment (as defined below) would be subject to the
excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as
amended (the "Code") or any interest or penalties with respect to such excise
tax (such excise tax, together with any interest or penalties thereon, is herein
referred to as an "Excise Tax"), then Executive shall be entitled to an
additional payment (a "Gross-Up Payment") in an amount that will place Executive
in the same after-tax economic position that Executive would have enjoyed if the
Excise Tax had not applied to the Payment. The amount of the Gross-Up Payment
shall be determined by the Accounting Firm (as defined below) in accordance with
the formula {(E x (1 - M)/(1 - T)) - E} (or such other formula as the Accounting
Firm deems appropriate which is intended to achieve the same result), where
E equals the Payments which are determined to be "excess
parachute payments" within the meaning of Section 280G(b)(1) of the
Code;
M equals the sum of the highest marginal rates(1) for Taxes
(as defined below) applicable to Executive at the time of the Payment;
and
- ------------------
(1)To be expressed in up to three decimal places. For example, a combined
federal, state and local marginal rate of 56% would be expressed as .560
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T equals M plus the rate of Excise Tax applicable to the
Payment.
No Gross-Up Payments shall be payable hereunder if the Accounting Firm
determines that the Payments are not subject to an Excise Tax.
B. DETERMINATION OF GROSS-UP PAYMENT. Subject to the provisions of
Section 9(C), all determinations required under this Section 9, including
whether a Gross-Up Payment is required, the amount of the Payments constituting
excess parachute payments, and the amount of the Gross-Up Payment, shall be made
by the Accounting Firm, which shall provide detailed supporting calculations to
both Executive and the Company within fifteen days of the Change in Control
Date, Executive's Date of Termination or any other date reasonably requested by
Executive or the Company on which a determination under this Section 9 is
necessary or advisable. The Company shall pay to Executive the initial Gross-Up
Payment within 5 days of the receipt by Executive and the Company of the
Accounting Firm's determination. If the Accounting Firm determines that no
Excise Tax is payable by Executive, the Company shall cause the Accounting Firm
to provide Executive with an opinion that the Accounting Firm has substantial
authority under the Code and Regulations not to report an Excise Tax on
Executive federal income tax return. Any determination by the Accounting Firm
shall be binding upon Executive and the Company. If the initial Gross-Up Payment
is insufficient to cover the amount of the Excise Tax that is ultimately
determined to be owing by Executive with respect to any Payment (hereinafter an
"Underpayment"), the Company, after exhausting its remedies under Section 9(C)
below, shall promptly pay to Executive an additional Gross-Up Payment in respect
of the Underpayment.
C. PROCEDURES. Executive shall notify the Company in writing of any
claim by the Internal Revenue Service that, if successful, would require the
payment by the Company of a Gross-Up Payment. Such notice shall be given as soon
as practicable after Executive knows of such claim and shall apprise the Company
of the nature of the claim and the date on which the claim is requested to be
paid. Executive agrees not to pay the claim until the expiration of the
thirty-day period following the date on which Executive notifies the Company, or
such shorter period ending on the date the Taxes with respect to such claim are
due (the "Notice Period"). If the Company notifies Executive in writing prior to
the expiration of the Notice Period that it desires to contest the claim,
Executive shall: (i) give the Company any information reasonably requested by
the Company relating to the claim; (ii) take such action in connection with the
claim as the Company may reasonably request, including, without limitation,
accepting legal representation with respect to such claim by an attorney
reasonably selected by the Company and reasonably acceptable to Executive; (iii)
cooperate with the Company in good faith in contesting the claim; and (iv)
permit the Company to participate in any proceedings relating to the claim.
Executive shall permit the Company to control all proceedings related to the
claim and, at its option, permit the Company to pursue or forgo any and all
administrative appeals, proceedings, hearings, and conferences with the taxing
authority in respect of such claim. If requested by the Company, Executive
agrees either to pay the tax claimed and sue for a refund or contest the claim
in any permissible manner and to prosecute such contest to a determination
before any administrative tribunal, in a court of initial jurisdiction and in
one or more appellate courts as the Company shall determine; PROVIDED, HOWEVER,
that, if the Company directs Executive to pay such
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claim and pursue a refund, the Company shall advance the amount of such payment
to Executive on an after-tax and interest-free basis (the "Advance"). The
Company's control of the contest related to the claim shall be limited to the
issues related to the Gross-Up Payment and Executive shall be entitled to settle
or contest, as the case may be, any other issues raised by the Internal Revenue
Service or other taxing authority. If the Company does not notify Executive in
writing prior to the end of the Notice Period of its desire to contest the
claim, the Company shall pay to Executive an additional Gross-Up Payment in
respect of the excess parachute payments that are the subject of the claim, and
Executive agrees to pay the amount of the Excise Tax that is the subject of the
claim to the applicable taxing authority in accordance with applicable law.
D. REPAYMENTS. If, after receipt by Executive of an Advance, Executive
becomes entitled to a refund with respect to the claim to which such Advance
relates, Executive shall pay the Company the amount of the refund (together with
any interest paid or credited thereon after Taxes applicable thereto). If, after
receipt by Executive of an Advance, a determination is made that Executive shall
not be entitled to any refund with respect to the claim and the Company does not
promptly notify Executive of its intent to contest the denial of refund, then
the amount of the Advance shall not be required to be repaid by Executive and
the amount thereof shall offset the amount of the additional Gross-Up Payment
then owing to Executive.
E. FURTHER ASSURANCES. The Company shall indemnify Executive and hold
Executive harmless, on an after-tax basis, from any costs, expenses, penalties,
fines, interest or other liabilities ("Losses") incurred by Executive with
respect to the exercise by the Company of any of its rights under this Section
9, including, without limitation, any Losses related to the Company's decision
to contest a claim or any imputed income to Executive resulting from any Advance
or action taken on Executive's behalf by the Company hereunder. The Company
shall pay all reasonable legal fees and expenses incurred under this Section 9,
and shall promptly reimburse Executive for the reasonable expenses incurred by
Executive in connection with any actions taken by the Company or required to be
taken by Executive hereunder. The Company shall also pay all of the fees and
expenses of the Accounting Firm, including, without limitation, the fees and
expenses related to the opinion referred to in Section 9(B).
F. DEFINITIONS. "ACCOUNTING FIRM" shall mean Ernst & Young or, if such
firm is unable or unwilling to perform such calculations, such other national
accounting firm as shall be designated by agreement between Executive and the
Company.
"CHANGE IN CONTROL DATE" shall mean the date on which the Change in
Control occurs.
"EQUITY PLANS" means the Company's Amended and Restated Stock Option
Plan, the Company's 1997 Equity Incentive Plan, as each may be amended from time
to time and any successor plans.
"PAYMENT" means (i) any amount due or paid to Executive under this
Agreement, (ii) any amount that is due or paid to Executive under any plan,
program or arrangement of the Company and its subsidiaries (including, without
limitation, the Equity Plans) and (iii) any amount or benefit that is due or
payable to Executive under this Agreement or under any plan, program or
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arrangement of the Company and its subsidiaries not otherwise covered under
clause (i) or (ii) hereof which must reasonably be taken into account under
Section 280G of the Code and the Regulations in determining the amount the
"parachute payments" received by Executive, including, without limitation, any
amounts which must be taken into account under the Code and Regulations as a
result of (A) the acceleration of the vesting of any option, restricted stock or
other equity award granted under the Equity Plans or otherwise, (B) the
acceleration of the time at which any payment or benefit is receivable by
Executive or (C) any contingent severance or other amounts that are payable to
Executive.
"REGULATIONS" shall mean the proposed, temporary and regulations under
Section 280G of the Code or any successor provision thereto.
"TAXES" shall mean the federal, state and local income taxes to which
Executive is subject at the time of determination, calculated on the basis of
the highest marginal rates then in effect, plus any additional payroll or
withholding taxes to which Executive is then subject.
G. ALTERNATIVE TO THE GROSS-UP PAYMENT. Notwithstanding anything to the
contrary in this Agreement, Executive hereby agrees that the Payments to be made
to Executive shall be reduced (and no Gross-up Payment will be paid to
Executive) so that none of the Payments constitute "parachute payments" within
the meaning of Section 280G(b)(2) of the Code, if, and only if, the Accounting
Firm determines that such reduction would result in the aggregate after excise
tax (but before income tax) value of the Payments so reduced being no more than
$20,000 less than the after excise tax (but before income tax) value of the sum
of the Payments and the relevant Gross-up Payment (assuming that the Payments
had not been reduced and a Gross-up Payment was paid to Executive).
10. ARBITRATION.
A. Any dispute or controversy arising under or in connection with this
Agreement and any claim by Executive that the Company breached any statutory or
common law duty to Executive (including but not limited to the law of tort,
contract, and all federal, state or local laws prohibiting employment
discrimination because of race, color, religion, sex, national origin, age,
veteran's status, or disability) that cannot be mutually resolved by the parties
hereto shall be settled exclusively by arbitration in Louisville, Kentucky
before one arbitrator of exemplary qualifications and stature, who shall be
selected jointly by the Company and the Executive, or, if the Company and the
Executive cannot agree on the selection of the arbitrator, shall be selected by
the American Arbitration Association (provided that any arbitrator selected by
the American Arbitration Association shall not, without the consent of the
parties hereto, be affiliated with the Company or the Executive or any of their
respective affiliates). Judgment may be entered on the arbitrator's award in any
court having jurisdiction. The parties hereby agree that the arbitrator shall be
empowered to enter an equitable decree mandating specific enforcement of the
terms of this Agreement, or in the event the arbitrator is resolving a dispute
over the breach of a statutory or common law duty, the parties agree that the
arbitrator shall be empowered to fashion a remedy that would have been available
had the matter been litigated in a judicial or administrative proceeding. The
Company shall bear all expenses of the arbitrator incurred in any arbitration or
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any court costs incurred in any court proceeding hereunder and shall promptly
reimburse the Executive (within 30 days of invoice) for any related reasonable
legal fees and out-of-pocket expenses directly attributable to such arbitration
or any court proceeding related to this Agreement; provided that such legal fees
are calculated on an hourly, and not on a contingency fee, basis; and, that the
Executive shall bear all expenses of the arbitrator and all of his legal fees
and out-of-pocket expenses (and reimburse the Company for its portion of such
expenses) if the arbitrator or relevant trier-of-fact determines that the
Executive's claim or position was frivolous and without reasonable foundation.
B. The parties agree that this requirement to arbitrate shall not apply
to any suit by either party seeking an injunction and/or damages for violation
of Sections 6 and/or 7 of this Agreement, it being specifically understood that
such claims arising under Sections 6 or 7 may be enforced in the first instance
in any court having jurisdiction of the parties.
C. If either party appeals the decision of the arbitrator, each party
shall bear its own expenses until the outcome of such appeal has been
determined, whereupon the prevailing party's expenses, including reasonable
legal fees, shall be reimbursed promptly by the other party.
11. MISCELLANEOUS.
A. NOTICES. All notices or communications hereunder shall be in
writing addressed as follows:
To the Company:
ARM Financial Group, Inc.
515 West Market Street
Louisville, Kentucky 40202-3271
Telecopier No.: (502) 582-7903
Attention: Chief Executive Officer
To the Executive:
ARM Financial Group, Inc.
515 West Market Street
Louisville, Kentucky 40202-3271
Telecopier No.: (502) 582-7903
or to such other address as either party may have furnished to the other in
writing in accordance herewith. All notices shall be conclusively deemed to be
received and shall be effective, (i) upon receipt if hand delivered; (ii) if
sent by telecopy or facsimile transmission, upon confirmation of receipt by the
sender of such transmission; or (iii) if sent by registered or certified mail,
on the fifth day after the day on which such notice is mailed.
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B. SEVERABILITY. Each provision of this Agreement shall be interpreted
in such manner as to be effective and valid under applicable law, but if any
provision of this Agreement is held to be prohibited by or invalid under
applicable law, such provision will be ineffective only to the extent of such
prohibition or invalidity, without invalidating the remainder of such provision
or the remaining provisions of this Agreement.
C. ASSIGNMENT. The Company's rights and obligations under this
Agreement shall not be assignable by the Company except as incident to a
reorganization, merger or consolidation, or transfer of all or substantially all
of the Company's business and properties (or portion thereof in which the
Executive is employed). Neither this Agreement nor any rights hereunder shall be
assignable or otherwise subject to hypothecation by the Executive. Nothing
herein is intended to affect the provisions of Sections 4(A)(3) and 5.
D. ENTIRE AGREEMENT. Except as expressly set forth herein, this
Agreement represents the entire Agreement of the parties concerning the subject
matter hereof and shall supersede any and all previous contracts, arrangements
or understandings between the Company and the Executive, including, without
limitation, the 1997 Agreement. This Agreement may be amended at any time by
mutual written agreement of the parties hereto. The parties expressly disclaim
that there were any representations or other understandings made to the other as
an inducement to enter into this Agreement except those that appear within this
Agreement.
E. WITHHOLDING. The payment of any amount pursuant to this Agreement
shall be subject to applicable withholding and payroll taxes, and such other
deductions as may be required under the company's employee benefit plans, if
any.
F. GOVERNING LAW. This Agreement shall be governed by and in accordance
with the laws of the Commonwealth of Kentucky.
IN WITNESS WHEREOF, the Company has caused this Agreement to be duly
executed and the Executive has hereunto set his hand, as of the day and year
first above.
ARM FINANCIAL GROUP, INC.
By: /s/ Martin H. Ruby
----------------------------------
Name:
----------------------------------
Title:
EXECUTIVE
By: /s/ John R. McGeeney
----------------------------------
Name: John R. McGeeney
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Exhibit 10.37
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as
of the 1st day of March, 1999 (the "Effective Date"), by and between ARM
FINANCIAL GROUP, INC., a Delaware corporation with its principal place of
business in the Commonwealth of Kentucky (the "Company"), and William H. Panning
("Executive").
WHEREAS the Company desires to employ Executive and to assure itself of
the continued services of Executive for the term provided for in this Agreement,
and Executive desires to be employed by the Company for such period, upon the
terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants hereinafter
set forth, the parties agree as follows:
1. EMPLOYMENT.
A. POSITION. The Company wishes to employ and the Executive hereby
accepts the position of Executive Vice President and Chief Investment Officer
for the Term (as defined in Section 2 below). Executive shall have such
responsibilities and powers normally associated with such office. Executive
shall perform such other duties as are commensurate with Executive's position,
and as may be determined by the Chief Executive Officer or the Board of
Directors of the Company (the "Board") from time to time.
B. EXECUTIVE'S COMMITMENT. Executive shall consider his employment by
the Company as his principal employment, shall devote the necessary time and
attention to his duties and responsibilities under this Agreement, and shall
perform them to the best of his abilities. While subject to any provisions of
this Agreement, Executive shall maintain loyalty to the Company, and shall take
no action which would directly or indirectly promote any competitor without the
approval of the Company, or injure any of the Company's interests. Subject to
the foregoing and Section 7 below, Executive may engage in other charitable,
civic, or business activities to the extent that they do not interfere with his
obligations under this Agreement, provided that Executive's participation in
those activities shall be subject to the Company's ongoing approval.
2. TERM OF EMPLOYMENT.
Unless terminated earlier as provided in Sections 4 and 5, the initial
term of Executive's employment shall be three years to commence with the
Effective Date (as it may be extended pursuant to the following sentence, the
"Term"). Commencing on the third anniversary date of this Agreement and on each
anniversary date thereafter the term of this Agreement shall be automatically
extended for a period of one year, and shall continue in effect from
year-to-year, unless (i) either party gives written notice of its intent to
terminate this Agreement at least 180
<PAGE>
days prior to an anniversary date (a "Nonrenewal Notice"), or (ii) this
Agreement is terminated as hereinafter set forth in Sections 4 and 5.
3. COMPENSATION AND BENEFITS.
A. BASE SALARY. Commencing with the Effective Date, the Company shall
pay Executive a base salary of $300,000 per annum, payable in accordance with
the Company's prevailing payroll policies. The Compensation Committee of the
Board shall review the Executive's base salary no less frequently than annually,
and on the basis of such review, may increase (but not decrease) such base
salary (as it may be so increased, the "Base Salary").
B. BONUS. Executive is entitled to participate in a cash bonus plan on
the same basis as similarly situated executives as may be determined by the
Compensation Committee, in its sole discretion.
C. BENEFITS. The Executive shall, during his employment under this
Agreement, be included to the extent eligible thereunder in all employee benefit
plans, programs or arrangements (including, without limitation, any plans,
programs or arrangements providing for retirement benefits, incentive
compensation, profit sharing, bonuses, disability benefits, health, dental and
life insurance, or vacation and paid holidays) which shall be established by the
Company for, or made available to, similarly situated executives. The Company
shall indemnify Executive to the fullest extent permitted by Delaware law and
the Company's Certificate of Incorporation and ByLaws, and the Company shall
procure and maintain insurance policies, to the extent reasonably available, for
the benefit of its directors and officers, including Executive.
4. TERMINATION OF EMPLOYMENT.
A. TERMINATION WITHOUT CAUSE; FAILURE TO RENEW WITHOUT CAUSE;
RESIGNATION FOR GOOD REASON. If, during the Term, Executive's employment is
terminated without Cause, the Company delivers a Nonrenewal Notice without
Cause, or if Executive resigns from his employment for Good Reason, the Company
shall pay executive severance pay in an amount equal to two times the sum of:
(1) Executive's Base Salary and (2) the greater of (i) the percentage of
Executive's actual earnings used to calculate bonus paid to the Executive in the
year preceding termination of employment multiplied by Base Salary or (ii) the
average of bonuses paid Executive over the last three years preceding the
termination or resignation, (the "Severance Payment"). The Severance Payment
shall be paid over twenty-four months in such equal installments as are
consistent with the Company's prevailing payroll policies. The Severance Payment
is subject to Executive fulfilling certain stipulations set forth in Section
4(A) hereof. Executive shall also be entitled to receive a PRO RATA portion of
any bonus paid for the year of termination payable at such time as payments are
generally made under the bonus plan, such bonus shall equal the greater of (i)
the percentage of Executive's actual earnings used to calculate bonus paid to
the Executive in the year preceding termination of employment multiplied by Base
Salary or (ii) the average of bonuses paid 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 Executive was employed by
the Company and the
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denominator is 365. Additionally, the Company shall continue to pay all (or the
applicable portion) of the premiums for such group insurance benefits (such as
health, life, and disability insurance policies) that covered Executive on the
day next preceding Executive's termination of employment for twenty-four months
following termination under this Section 4(A). Executive shall have no further
right to receive any other compensation or benefits after termination or
resignation except as may be provided by the terms of the Company's employee
benefit plans or programs.
1. RELEASE OF CLAIMS. To receive the severance benefits
described in this Section 4(A), Executive must execute in a form
reasonably suitable to the Company a release and waiver of all claims
Executive may have against the Company, or any of its subsidiaries,
parents, officers, directors, and agents arising out of Executive's
employment with the Company or the termination or resignation of
employment, including any claims for employment discrimination under
any and all statutes and regulations which prohibit employment
discrimination because of race, sex, national origin, color, age,
religion, disability, or veteran's status, including but not limited to
the Federal Age Discrimination in Employment Act.
2. FURTHER STIPULATIONS. The Company may not terminate any
severance payments and insurance premium payments due Executive under
this Section 4(A) prior to a ruling or order issued by an arbitration
panel or court of competent jurisdiction finding that the Executive has
materially breached Section 6 or 7 of this Agreement and that such a
remedy is equitable hereunder.
3. DEATH BEFORE SEVERANCE IS PAID. Any severance due Executive
at the time Executive dies shall be paid when due under Section 4(A) to
the beneficiary designated by the Executive in writing to receive these
funds, or if no beneficiary is designated, to the Executive's estate.
B. TERMINATION FOR CAUSE; FAILURE TO RENEW FOR CAUSE; RESIGNATION
WITHOUT GOOD REASON. If, during the Term, the Company terminates Executive's
employment for Cause or if Executive resigns without Good Reason, then Executive
shall be entitled to receive Base Salary through the date specified in the
notice of termination, or 10 business days after receipt by the Company of a
notice of resignation. Executive shall have no further rights to receive any
other form of compensation or benefits after such termination or resignation of
employment, except as determined in accordance with the terms of the Company's
employee benefit plans or programs.
1. CAUSE. Termination for Cause shall mean termination of
Executive's employment because of:
(i) any act or omission by Executive that constitutes a
material breach of this Agreement;
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(ii) the continued failure or refusal of Executive to
perform the material duties required of him as an employee of
the Company (other than because of death or disability);
(iii) any willful material violation by the Executive
of any law or regulation applicable to the business of the
Company or its subsidiaries, or the Executive's conviction of
a felony, or any willful perpetration by the Executive of a
common law fraud; or
(iv) any willful misconduct by Executive which causes
material financial injury to the Company or materially harms
its business reputation, or otherwise is materially injurious
to the Company, its subsidiaries, or affiliates;
provided, however, that if any such Cause relates to Executive's obligations
under this Agreement and is (x) susceptible to cure and (y) does not constitute
a repetition of Cause, then the Company shall not terminate Executive's
employment hereunder unless the Company first gives Executive notice of its
intention to terminate and of the grounds for such termination, and Executive
has not, within 10 business days following receipt of the notice, cured such
Cause, or in the event such Cause is not susceptible to cure within such 10
business day period, Executive has not taken all reasonable steps within such 10
business day period to cure such Cause as promptly as practicable thereafter;
and provided further that no action or omission shall be deemed to be Cause if
taken in reliance upon the clear directive of the Company's Chief Executive
Officer or Board of Directors.
2. GOOD REASON. Resignation with Good Reason, for purposes of
this Agreement, shall mean any of the following (without Executive's
written consent):
(i) a reduction in Executive's Base Salary or a
failure by the Company to pay material compensation when due
in connection with Executive's employment;
(ii) material diminution of authority,
responsibilities or positions of Executive;
(iii) the failure of a successor to the Company to
assume and agree to and abide by the terms and condition of
this Agreement; or
(iv) the failure to fully compensate Executive for
any increase in Executive's cost of living associated with the
Company's relocation of Executive's place of employment,
including without limitation, costs associated directly with
such relocation, housing costs, and any differences in the
appropriate cost of living indices;
provided, however, that if any such Good Reason is (x) susceptible to cure and
(y) does not constitute a repetition of Good Reason, then Executive shall not
terminate his employment
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hereunder unless Executive first gives the Company notice of his intention to
terminate and of the grounds for such termination, and the Company has not,
within 10 business days following receipt of the notice, cured such Good Reason,
or in the event such Good Reason is not susceptible to cure within such 10
business day period, the Company has not taken all reasonable steps within such
10 business day period to cure such Good Reason as promptly as practicable
thereafter.
C. CHANGE OF CONTROL. In the event of a Change of Control (as defined
below), the Executive may terminate his employment and this Agreement upon 30
days' written notice to the Company during the 30-day period following the
18-month period after the occurrence of the Change of Control (or such shorter
period to the extent the acquiring company does not request the services of the
Executive for such 18-month period). In the event of such a termination by
Executive, Executive shall be entitled to receive all of the benefits described
in Section 4(A) above (subject to compliance with the conditions set forth
therein). For purposes of this Agreement, a "Change of Control" shall have the
meaning ascribed thereto in the Company's 1997 Equity Incentive Plan in its form
on the effective date of this Agreement.
5. DEATH OR DISABILITY.
In the event of the termination of Executive's employment by reason of
death or Permanent Disability (as herein defined) the Executive (or his estate,
if applicable) shall be entitled to compensation and benefits under Section 3
through the date of termination, which is the date of death or the date
Executive commences to receive permanent disability benefits under the Company's
disability insurance program. Executive shall also be entitled to receive a PRO
RATA portion of any bonus paid for the year of termination payable at such time
as payments are generally made under the bonus plan and subject to the
attainment of the performance goals thereunder. The Executive (or his estate or
guardian) shall have no further right to receive any other compensation or
benefits after such termination except as may be determined in accordance with
the terms of the Company's employee benefit plans or programs. For purposes of
this agreement, "permanent disability" means a physical or mental disability or
infirmity of the Executive which prevents the normal performance of
substantially all of his duties as an employee of the Company, which disability
or infirmity shall exist, or in the opinion of an independent physician is
reasonably likely to exist, for any continuous period of 180 days or days
aggregating 180 days in any one year period.
6. CONFIDENTIALITY.
A. CONFIDENTIAL INFORMATION. "Confidential Information" means
information in whatever form, including information that is written,
electronically stored, orally transmitted, or memorized, which has a commercial
value to the Company and which is created, discovered, developed, or otherwise
becomes known to the Company, or in which property rights are held, assigned to
or otherwise acquired by or conveyed to the Company, including any system,
method, technique, research and development, technology, software, technical
information, trade secret, trademark, copyrighted material, reports, records,
documentation, data, customer or supplier lists, tax or financial information
(including the revenues, profits, and costs associated
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with any of the Company's products or services), business or marketing plans,
strategy, pricing information or forecasts. Confidential Information does not
include information which becomes generally known within the Company's industry
through no act or omission by Executive.
B. OWNERSHIP; DISCLOSURE. Any Confidential Information, whether or not
developed by Executive, shall at all times be the Company's exclusive property.
Executive shall, upon termination of employment, return the original and any
copy of Confidential Information to the Company.
C. RESTRICTION. During the term of this Agreement, and at any time
thereafter Executive shall not without the Company's prior written consent
specifically referring to this covenant,
(1) use any Confidential Information for the benefit of
himself or any other party other than the Company or disclose it to any
other person or entity;
(2) remove Confidential Information or documentation, device,
plan, or other records pertaining to Company's business from the
Company's premises, except when specifically authorized to do so in
pursuit of the Company's business; or
(3) retain copies or other records of any such items.
D. PURPOSE. The parties acknowledge and agree that the Confidential
Information is a valuable business asset, and this section is necessary to
protect the Company's legitimate business interests.
7. COVENANT NOT TO COMPETE/NON-SOLICITATION.
A. COVENANT. During the time of his employment and for a period of two
years following termination of employment, subject to the last sentence of this
Section 7(A), the Executive shall not, without prior written consent of the
Company, which in its exclusive discretion it may withhold, directly or
indirectly, for any reason:
(1) engage in, assist, or have any interest in, including
without limitation as a principal, consultant, employee, owner,
shareholder, director, officer, partner, member, advisor, agent or
financier, any activity which is in competition with the Company where
the Company does business; provided, this subsection shall not prohibit
investment by the Executive not exceeding five percent (5%) of the
outstanding securities of a publicly traded company so long as he does
not serve as an employee, director or consultant with respect to any
activities of such corporation which are in competition with the
Company where the Company does business;
(2) directly or indirectly influence any of the Company's
employees, officers, agents, or consultants to terminate their
employment or relationship with the Company or accept employment or a
business relationship with any of the Company's competitors;
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(3) interfere with or solicit for any purpose contrary to the
best interests of the Company any of the Company' s contracts or
business relationships, including without limitation those with
customers, suppliers, consultants, attorneys, or other agents, whether
evidenced by written or oral agreement; or
(4) at no time during or after termination of employment shall
Executive or the Company utter, issue or circulate any false,
inappropriate or disparaging statements, remarks or rumors about each
other unless giving truthful testimony under subpoena.
Notwithstanding the foregoing, Section 7(A)(1) shall not apply following the
Company's termination of Executive's employment without Cause, the Executive's
resignation with Good Reason, either party's non-renewal by delivery of a
Nonrenewal Notice, or in any event after a Change in Control. For purposes of
Sections 6 and 7 of this Agreement, the "Company" shall mean the Company
together with its subsidiaries.
B. EXTENSION OF RESTRICTED PERIOD. The period of applicability of
Section 7(A) shall be extended an additional day for each day on which Executive
is in breach of Section 7(A).
8. REMEDIES.
A. IRREPARABLE HARM. The parties acknowledge and agree that irreparable
harm would result in the event of a threatened or actual material breach by
either party of Section 6 or 7 of this Agreement or the making of any untrue
representation or warranty by Executive in this Agreement. Therefore, in such an
event, and notwithstanding any other provision of this Agreement,
(1) The non-breaching party shall be entitled to a restraining
order, order of specific performance, or other injunctive relief,
without showing actual damage and without bond or other security;
(2) The Company's obligation in making payment or providing
any benefit under this Agreement, including without limitation any
severance benefits, shall immediately cease upon the Company's
obtaining an order or ruling described in Section 4(A)(2) of this
Agreement.
(3) If the Executive breaches Section 7 of this Agreement the
parties agree that the Company may seek relief in any court having
jurisdiction of the dispute and shall be entitled to an injunction to
enforce Section 7 for a period of two (2) years following the
Executive's last breach.
B. REMEDIES NOT EXCLUSIVE. Neither party's remedies hereunder are
exclusive, they shall not prejudice or prohibit any other rights or remedies
under this Agreement or otherwise. To the extent required to be enforced by
applicable law, the cessation of the Company's obligations to make payments and
continue benefits under this Agreement shall deemed to be in the nature of
liquidated damages and not a penalty. If for any reason, it is held that the
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restrictions under Section 6 or 7 are not reasonable or that consideration
therefor is inadequate, such restrictions shall be interpreted or modified to
include as much of the duration and scope identified in Section 6 or 7 as will
render such restrictions valid and enforceable.
9. ADDITIONAL PAYMENT.
A. GROSS-UP PAYMENT. Notwithstanding anything herein to the contrary,
if it is determined that any Payment (as defined below) would be subject to the
excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as
amended (the "Code") or any interest or penalties with respect to such excise
tax (such excise tax, together with any interest or penalties thereon, is herein
referred to as an "Excise Tax"), then Executive shall be entitled to an
additional payment (a "Gross-Up Payment") in an amount that will place Executive
in the same after-tax economic position that Executive would have enjoyed if the
Excise Tax had not applied to the Payment. The amount of the Gross-Up Payment
shall be determined by the Accounting Firm (as defined below) in accordance with
the formula {(E x (1 - M)/(1 - T)) - E} (or such other formula as the Accounting
Firm deems appropriate which is intended to achieve the same result), where
E equals the Payments which are determined to be "excess
parachute payments" within the meaning of Section 280G(b)(1) of the
Code;
M equals the sum of the highest marginal rates(1) for Taxes
(as defined below) applicable to Executive at the time of the Payment;
and
- ----------------
(1) To be expressed in up to three decimal places. For example, a combined
federal, state and local marginal rate of 56% would be expressed as .560
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T equals M plus the rate of Excise Tax applicable to the
Payment.
No Gross-Up Payments shall be payable hereunder if the Accounting Firm
determines that the Payments are not subject to an Excise Tax.
B. DETERMINATION OF GROSS-UP PAYMENT. Subject to the provisions of
Section 9(C), all determinations required under this Section 9, including
whether a Gross-Up Payment is required, the amount of the Payments constituting
excess parachute payments, and the amount of the Gross-Up Payment, shall be made
by the Accounting Firm, which shall provide detailed supporting calculations to
both Executive and the Company within fifteen days of the Change in Control
Date, Executive's Date of Termination or any other date reasonably requested by
Executive or the Company on which a determination under this Section 9 is
necessary or advisable. The Company shall pay to Executive the initial Gross-Up
Payment within 5 days of the receipt by Executive and the Company of the
Accounting Firm's determination. If the Accounting Firm determines that no
Excise Tax is payable by Executive, the Company shall cause the Accounting Firm
to provide Executive with an opinion that the Accounting Firm has substantial
authority under the Code and Regulations not to report an Excise Tax on
Executive federal income tax return. Any determination by the Accounting Firm
shall be binding upon Executive and the Company. If the initial Gross-Up Payment
is insufficient to cover the amount of the Excise Tax that is ultimately
determined to be owing by Executive with respect to any Payment (hereinafter an
"Underpayment"), the Company, after exhausting its remedies under Section 9(C)
below, shall promptly pay to Executive an additional Gross-Up Payment in respect
of the Underpayment.
C. PROCEDURES. Executive shall notify the Company in writing of any
claim by the Internal Revenue Service that, if successful, would require the
payment by the Company of a Gross-Up Payment. Such notice shall be given as soon
as practicable after Executive knows of such claim and shall apprise the Company
of the nature of the claim and the date on which the claim is requested to be
paid. Executive agrees not to pay the claim until the expiration of the
thirty-day period following the date on which Executive notifies the Company, or
such shorter period ending on the date the Taxes with respect to such claim are
due (the "Notice Period"). If the Company notifies Executive in writing prior to
the expiration of the Notice Period that it desires to contest the claim,
Executive shall: (i) give the Company any information reasonably requested by
the Company relating to the claim; (ii) take such action in connection with the
claim as the Company may reasonably request, including, without limitation,
accepting legal representation with respect to such claim by an attorney
reasonably selected by the Company and reasonably acceptable to Executive; (iii)
cooperate with the Company in good faith in contesting the claim; and (iv)
permit the Company to participate in any proceedings relating to the claim.
Executive shall permit the Company to control all proceedings related to the
claim and, at its option, permit the Company to pursue or forgo any and all
administrative appeals, proceedings, hearings, and conferences with the taxing
authority in respect of such claim. If requested by the Company, Executive
agrees either to pay the tax claimed and sue for a refund or contest the claim
in any permissible manner and to prosecute such contest to a determination
before any administrative tribunal, in a court of initial jurisdiction and in
one or more appellate courts as the Company shall determine; PROVIDED, HOWEVER,
that, if the Company directs Executive to pay such
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claim and pursue a refund, the Company shall advance the amount of such payment
to Executive on an after-tax and interest-free basis (the "Advance"). The
Company's control of the contest related to the claim shall be limited to the
issues related to the Gross-Up Payment and Executive shall be entitled to settle
or contest, as the case may be, any other issues raised by the Internal Revenue
Service or other taxing authority. If the Company does not notify Executive in
writing prior to the end of the Notice Period of its desire to contest the
claim, the Company shall pay to Executive an additional Gross-Up Payment in
respect of the excess parachute payments that are the subject of the claim, and
Executive agrees to pay the amount of the Excise Tax that is the subject of the
claim to the applicable taxing authority in accordance with applicable law.
D. REPAYMENTS. If, after receipt by Executive of an Advance, Executive
becomes entitled to a refund with respect to the claim to which such Advance
relates, Executive shall pay the Company the amount of the refund (together with
any interest paid or credited thereon after Taxes applicable thereto). If, after
receipt by Executive of an Advance, a determination is made that Executive shall
not be entitled to any refund with respect to the claim and the Company does not
promptly notify Executive of its intent to contest the denial of refund, then
the amount of the Advance shall not be required to be repaid by Executive and
the amount thereof shall offset the amount of the additional Gross-Up Payment
then owing to Executive.
E. FURTHER ASSURANCES. The Company shall indemnify Executive and hold
Executive harmless, on an after-tax basis, from any costs, expenses, penalties,
fines, interest or other liabilities ("Losses") incurred by Executive with
respect to the exercise by the Company of any of its rights under this Section
9, including, without limitation, any Losses related to the Company's decision
to contest a claim or any imputed income to Executive resulting from any Advance
or action taken on Executive's behalf by the Company hereunder. The Company
shall pay all reasonable legal fees and expenses incurred under this Section 9,
and shall promptly reimburse Executive for the reasonable expenses incurred by
Executive in connection with any actions taken by the Company or required to be
taken by Executive hereunder. The Company shall also pay all of the fees and
expenses of the Accounting Firm, including, without limitation, the fees and
expenses related to the opinion referred to in Section 9(B).
F. DEFINITIONS. "ACCOUNTING FIRM" shall mean Ernst & Young or, if such
firm is unable or unwilling to perform such calculations, such other national
accounting firm as shall be designated by agreement between Executive and the
Company.
"CHANGE IN CONTROL DATE" shall mean the date on which the Change in
Control occurs.
"EQUITY PLANS" means the Company's Amended and Restated Stock Option
Plan, the Company's 1997 Equity Incentive Plan, as each may be amended from time
to time and any successor plans.
"PAYMENT" means (i) any amount due or paid to Executive under this
Agreement, (ii) any amount that is due or paid to Executive under any plan,
program or arrangement of the Company and its subsidiaries (including, without
limitation, the Equity Plans) and (iii) any amount or benefit that is due or
payable to Executive under this Agreement or under any plan, program or
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arrangement of the Company and its subsidiaries not otherwise covered under
clause (i) or (ii) hereof which must reasonably be taken into account under
Section 280G of the Code and the Regulations in determining the amount the
"parachute payments" received by Executive, including, without limitation, any
amounts which must be taken into account under the Code and Regulations as a
result of (A) the acceleration of the vesting of any option, restricted stock or
other equity award granted under the Equity Plans or otherwise, (B) the
acceleration of the time at which any payment or benefit is receivable by
Executive or (C) any contingent severance or other amounts that are payable to
Executive.
"REGULATIONS" shall mean the proposed, temporary and regulations under
Section 280G of the Code or any successor provision thereto.
"TAXES" shall mean the federal, state and local income taxes to which
Executive is subject at the time of determination, calculated on the basis of
the highest marginal rates then in effect, plus any additional payroll or
withholding taxes to which Executive is then subject.
G. ALTERNATIVE TO THE GROSS-UP PAYMENT. Notwithstanding anything to the
contrary in this Agreement, Executive hereby agrees that the Payments to be made
to Executive shall be reduced (and no Gross-up Payment will be paid to
Executive) so that none of the Payments constitute "parachute payments" within
the meaning of Section 280G(b)(2) of the Code, if, and only if, the Accounting
Firm determines that such reduction would result in the aggregate after excise
tax (but before income tax) value of the Payments so reduced being no more than
$20,000 less than the after excise tax (but before income tax) value of the sum
of the Payments and the relevant Gross-up Payment (assuming that the Payments
had not been reduced and a Gross-up Payment was paid to Executive).
10. ARBITRATION.
A. Any dispute or controversy arising under or in connection with this
Agreement and any claim by Executive that the Company breached any statutory or
common law duty to Executive (including but not limited to the law of tort,
contract, and all federal, state or local laws prohibiting employment
discrimination because of race, color, religion, sex, national origin, age,
veteran's status, or disability) that cannot be mutually resolved by the parties
hereto shall be settled exclusively by arbitration in Louisville, Kentucky
before one arbitrator of exemplary qualifications and stature, who shall be
selected jointly by the Company and the Executive, or, if the Company and the
Executive cannot agree on the selection of the arbitrator, shall be selected by
the American Arbitration Association (provided that any arbitrator selected by
the American Arbitration Association shall not, without the consent of the
parties hereto, be affiliated with the Company or the Executive or any of their
respective affiliates). Judgment may be entered on the arbitrator's award in any
court having jurisdiction. The parties hereby agree that the arbitrator shall be
empowered to enter an equitable decree mandating specific enforcement of the
terms of this Agreement, or in the event the arbitrator is resolving a dispute
over the breach of a statutory or common law duty, the parties agree that the
arbitrator shall be empowered to fashion a remedy that would have been available
had the matter been litigated in a judicial or administrative proceeding. The
Company shall bear all expenses of the arbitrator incurred in any arbitration or
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any court costs incurred in any court proceeding hereunder and shall promptly
reimburse the Executive (within 30 days of invoice) for any related reasonable
legal fees and out-of-pocket expenses directly attributable to such arbitration
or any court proceeding related to this Agreement; provided that such legal fees
are calculated on an hourly, and not on a contingency fee, basis; and, that the
Executive shall bear all expenses of the arbitrator and all of his legal fees
and out-of-pocket expenses (and reimburse the Company for its portion of such
expenses) if the arbitrator or relevant trier-of-fact determines that the
Executive's claim or position was frivolous and without reasonable foundation.
B. The parties agree that this requirement to arbitrate shall not apply
to any suit by either party seeking an injunction and/or damages for violation
of Sections 6 and/or 7 of this Agreement, it being specifically understood that
such claims arising under Sections 6 or 7 may be enforced in the first instance
in any court having jurisdiction of the parties.
C. If either party appeals the decision of the arbitrator, each party
shall bear its own expenses until the outcome of such appeal has been
determined, whereupon the prevailing party's expenses, including reasonable
legal fees, shall be reimbursed promptly by the other party.
11. ADDITIONAL REPRESENTATIONS AND WARRANTIES. Executive represents and warrants
as follows:
(1) Executive's performance of this Agreement shall not breach any
agreement to which he is or was a party and which requires him to hold any
information in confidence and trust;
(2) Executive has not and shall not breach any such agreement;
(3) Executive has not brought to Company or used in connection with his
employment any confidential or proprietary information belonging to another
entity without delivering a written release of that information to the Company;
and
(4) Executive has provided Company with an original and two (2) copies
of any employment, non-competition, confidential or proprietary information, or
similar agreement, to which he is or has been a party which is now in effect or
which may become effective during the term of this Agreement.
12. MISCELLANEOUS.
A. NOTICES. All notices or communications hereunder shall be in
writing addressed as follows:
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To the Company:
ARM Financial Group, Inc.
515 West Market Street
Louisville, Kentucky 40202-3271
Telecopier No.: (502) 582-7903
Attention: General Counsel
To the Executive:
ARM Financial Group, Inc.
515 West Market Street
Louisville, Kentucky 40202-3271
Telecopier No.: (502) 582-7903
or to such other address as either party may have furnished to the other in
writing in accordance herewith. All notices shall be conclusively deemed to be
received and shall be effective, (i) upon receipt if hand delivered; (ii) if
sent by telecopy or facsimile transmission, upon confirmation of receipt by the
sender of such transmission; or (iii) if sent by registered or certified mail,
on the fifth day after the day on which such notice is mailed.
B. SEVERABILITY. Each provision of this Agreement shall be interpreted
in such manner as to be effective and valid under applicable law, but if any
provision of this Agreement is held to be prohibited by or invalid under
applicable law, such provision will be ineffective only to the extent of such
prohibition or invalidity, without invalidating the remainder of such provision
or the remaining provisions of this Agreement.
C. ASSIGNMENT. The Company's rights and obligations under this
Agreement shall not be assignable by the Company except as incident to a
reorganization, merger or consolidation, or transfer of all or substantially all
of the Company's business and properties (or portion thereof in which the
Executive is employed). Neither this Agreement nor any rights hereunder shall be
assignable or otherwise subject to hypothecation by the Executive. Nothing
herein is intended to affect the provisions of Sections 4(A)(3) and 5.
D. ENTIRE AGREEMENT. Except as expressly set forth herein, this
Agreement represents the entire Agreement of the parties concerning the subject
matter hereof and shall supersede any and all previous contracts, arrangements
or understandings between the Company and the Executive. This Agreement may be
amended at any time by mutual written agreement of the parties hereto. The
parties expressly disclaim that there were any representations or other
understandings made to the other as an inducement to enter into this Agreement
except those that appear within this Agreement.
E. WITHHOLDING. The payment of any amount pursuant to this Agreement
shall be subject to applicable withholding and payroll taxes, and such other
deductions as may be required under the company's employee benefit plans, if
any.
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F. GOVERNING LAW. This Agreement shall be governed by and in accordance
with the laws of the Commonwealth of Kentucky.
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IN WITNESS WHEREOF, the Company has caused this Agreement to be duly
executed and the Executive has hereunto set his hand, as of the day and year
first above.
ARM FINANCIAL GROUP, INC.
By: /s/ Martin H. Ruby
--------------------------------------
Name:
--------------------------------------
Title:
EXECUTIVE
By: /s/ William H. Panning
--------------------------------------
Name: William H. Panning
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Exhibit 10.38
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as
of the 1st day of March, 1999 (the "Effective Date"), by and between ARM
FINANCIAL GROUP, INC., a Delaware corporation with its principal place of
business in the Commonwealth of Kentucky (the "Company"), and Edward L. Zeman
("Executive").
WHEREAS the parties have executed an employment agreement dated
December 4, 1997, which has been amended from time to time (the "1997
Agreement") and which provides certain benefits in the event of a change in
control of the Company; and
WHEREAS the parties desire to terminate and replace the 1997 Agreement
with the present Agreement, and to restate the terms and conditions of
Executive's employment with the Company,
NOW, THEREFORE, in consideration of the mutual covenants hereinafter
set forth, the parties agree as follows:
1. EMPLOYMENT.
A. POSITION. The Company wishes to employ and the Executive hereby
accepts the position of Executive Vice President and Chief Financial Officer for
the Term (as defined in Section 2 below). Executive shall have such
responsibilities and powers normally associated with such office. Executive
shall perform such other duties as are commensurate with Executive's position,
and as may be determined by the Chief Executive Officer or the Board of
Directors of the Company (the "Board") from time to time.
B. EXECUTIVE'S COMMITMENT. Executive shall consider his employment by
the Company as his principal employment, shall devote the necessary time and
attention to his duties and responsibilities under this Agreement, and shall
perform them to the best of his abilities. While subject to any provisions of
this Agreement, Executive shall maintain loyalty to the Company, and shall take
no action which would directly or indirectly promote any competitor without the
approval of the Company, or injure any of the Company's interests. Subject to
the foregoing and Section 7 below, Executive may engage in other charitable,
civic, or business activities to the extent that they do not interfere with his
obligations under this Agreement, provided that Executive's participation in
those activities shall be subject to the Company's ongoing approval.
2. TERM OF EMPLOYMENT.
Unless terminated earlier as provided in Sections 4 and 5, the initial
term of Executive's employment shall be three years to commence with the
Effective Date (as it may be extended pursuant to the following sentence, the
"Term"). Commencing on the third anniversary date of this Agreement and on each
anniversary date thereafter the term of this Agreement shall be
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automatically extended for a period of one year, and shall continue in effect
from year-to-year, unless (i) either party gives written notice of its intent to
terminate this Agreement at least 180 days prior to an anniversary date (a
"Nonrenewal Notice"), or (ii) this Agreement is terminated as hereinafter set
forth in Sections 4 and 5.
3. COMPENSATION AND BENEFITS.
A. BASE SALARY. Commencing with the Effective Date, the Company shall
pay Executive a base salary of $235,000 per annum, payable in accordance with
the Company's prevailing payroll policies. The Compensation Committee of the
Board shall review the Executive's base salary no less frequently than annually,
and on the basis of such review, may increase (but not decrease) such base
salary (as it may be so increased, the "Base Salary").
B. BONUS. Executive is entitled to participate in a cash bonus plan on
the same basis as similarly situated executives as may be determined by the
Compensation Committee, in its sole discretion.
C. BENEFITS. The Executive shall, during his employment under this
Agreement, be included to the extent eligible thereunder in all employee benefit
plans, programs or arrangements (including, without limitation, any plans,
programs or arrangements providing for retirement benefits, incentive
compensation, profit sharing, bonuses, disability benefits, health, dental and
life insurance, or vacation and paid holidays) which shall be established by the
Company for, or made available to, similarly situated executives. The Company
shall indemnify Executive to the fullest extent permitted by Delaware law and
the Company's Certificate of Incorporation and ByLaws, and the Company shall
procure and maintain insurance policies, to the extent reasonably available, for
the benefit of its directors and officers, including Executive.
4. TERMINATION OF EMPLOYMENT.
A. TERMINATION WITHOUT CAUSE; FAILURE TO RENEW WITHOUT CAUSE;
RESIGNATION FOR GOOD REASON. If, during the Term, Executive's employment is
terminated without Cause, the Company delivers a Nonrenewal Notice without
Cause, or if Executive resigns from his employment for Good Reason, the Company
shall pay executive severance pay in an amount equal to two times the sum of:
(1) Executive's Base Salary and (2) the greater of (i) the percentage of
Executive's actual earnings used to calculate bonus paid to the Executive in the
year preceding termination of employment multiplied by Base Salary or (ii) the
average of bonuses paid Executive over the last three years preceding the
termination or resignation, (the "Severance Payment"). The Severance Payment
shall be paid over twenty-four months in such equal installments as are
consistent with the Company's prevailing payroll policies. The Severance Payment
is subject to Executive fulfilling certain stipulations set forth in Section
4(A) hereof. Executive shall also be entitled to receive a PRO RATA portion of
any bonus paid for the year of termination payable at such time as payments are
generally made under the bonus plan, such bonus shall equal the greater of (i)
the percentage of Executive's actual earnings used to calculate bonus paid to
the Executive in the year preceding termination of employment multiplied by Base
Salary or (ii) the average of bonuses paid Executive over the last three years
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preceding the termination or resignation, multiplied by a fraction where the
numerator is the number of days during the year that Executive was employed by
the Company and the denominator is 365. Additionally, the Company shall continue
to pay all (or the applicable portion) of the premiums for such group insurance
benefits (such as health, life, and disability insurance policies) that covered
Executive on the day next preceding Executive's termination of employment for
twenty-four months following termination under this Section 4(A). Executive
shall have no further right to receive any other compensation or benefits after
termination or resignation except as may be provided by the terms of the
Company's employee benefit plans or programs.
1. RELEASE OF CLAIMS. To receive the severance benefits
described in this Section 4(A), Executive must execute in a form
reasonably suitable to the Company a release and waiver of all claims
Executive may have against the Company, or any of its subsidiaries,
parents, officers, directors, and agents arising out of Executive's
employment with the Company or the termination or resignation of
employment, including any claims for employment discrimination under
any and all statutes and regulations which prohibit employment
discrimination because of race, sex, national origin, color, age,
religion, disability, or veteran's status, including but not limited to
the Federal Age Discrimination in Employment Act.
2. FURTHER STIPULATIONS. The Company may not terminate any
severance payments and insurance premium payments due Executive under
this Section 4(A) prior to a ruling or order issued by an arbitration
panel or court of competent jurisdiction finding that the Executive has
materially breached Section 6 or 7 of this Agreement and that such a
remedy is equitable hereunder.
3. DEATH BEFORE SEVERANCE IS PAID. Any severance due Executive
at the time Executive dies shall be paid when due under Section 4(A) to
the beneficiary designated by the Executive in writing to receive these
funds, or if no beneficiary is designated, to the Executive's estate.
B. TERMINATION FOR CAUSE; FAILURE TO RENEW FOR CAUSE; RESIGNATION
WITHOUT GOOD REASON. If, during the Term, the Company terminates Executive's
employment for Cause or if Executive resigns without Good Reason, then Executive
shall be entitled to receive Base Salary through the date specified in the
notice of termination, or 10 business days after receipt by the Company of a
notice of resignation. Executive shall have no further rights to receive any
other form of compensation or benefits after such termination or resignation of
employment, except as determined in accordance with the terms of the Company's
employee benefit plans or programs.
1. CAUSE. Termination for Cause shall mean termination of
Executive's employment because of:
(i) any act or omission by Executive that constitutes
a material breach of this Agreement;
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(ii) the continued failure or refusal of Executive to
perform the material duties required of him as an employee of
the Company (other than because of death or disability);
(iii) any willful material violation by the Executive
of any law or regulation applicable to the business of the
Company or its subsidiaries, or the Executive's conviction of
a felony, or any willful perpetration by the Executive of a
common law fraud; or
(iv) any willful misconduct by Executive which causes
material financial injury to the Company or materially harms
its business reputation, or otherwise is materially injurious
to the Company, its subsidiaries, or affiliates;
provided, however, that if any such Cause relates to Executive's obligations
under this Agreement and is (x) susceptible to cure and (y) does not constitute
a repetition of Cause, then the Company shall not terminate Executive's
employment hereunder unless the Company first gives Executive notice of its
intention to terminate and of the grounds for such termination, and Executive
has not, within 10 business days following receipt of the notice, cured such
Cause, or in the event such Cause is not susceptible to cure within such 10
business day period, Executive has not taken all reasonable steps within such 10
business day period to cure such Cause as promptly as practicable thereafter;
and provided further that no action or omission shall be deemed to be Cause if
taken in reliance upon the clear directive of the Company's Chief Executive
Officer or Board of Directors.
2. GOOD REASON. Resignation with Good Reason, for purposes of
this Agreement, shall mean any of the following (without Executive's
written consent):
(i) a reduction in Executive's Base Salary or a
failure by the Company to pay material compensation when due
in connection with Executive's employment;
(ii) material diminution of authority,
responsibilities or positions of Executive;
(iii) the failure of a successor to the Company to
assume and agree to and abide by the terms and condition of
this Agreement; or
(iv) the failure to fully compensate Executive for
any increase in Executive's cost of living associated with the
Company's relocation of Executive's place of employment,
including without limitation, costs associated directly with
such relocation, housing costs, and any differences in the
appropriate cost of living indices;
provided, however, that if any such Good Reason is (x) susceptible to cure and
(y) does not constitute a repetition of Good Reason, then Executive shall not
terminate his employment
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hereunder unless Executive first gives the Company notice of his intention to
terminate and of the grounds for such termination, and the Company has not,
within 10 business days following receipt of the notice, cured such Good Reason,
or in the event such Good Reason is not susceptible to cure within such 10
business day period, the Company has not taken all reasonable steps within such
10 business day period to cure such Good Reason as promptly as practicable
thereafter.
C. CHANGE OF CONTROL. In the event of a Change of Control (as defined
below), the Executive may terminate his employment and this Agreement upon 30
days' written notice to the Company during the 30-day period following the
18-month period after the occurrence of the Change of Control (or such shorter
period to the extent the acquiring company does not request the services of the
Executive for such 18-month period). In the event of such a termination by
Executive, Executive shall be entitled to receive all of the benefits described
in Section 4(A) above (subject to compliance with the conditions set forth
therein). For purposes of this Agreement, a "Change of Control" shall have the
meaning ascribed thereto in the Company's 1997 Equity Incentive Plan in its form
on the effective date of this Agreement.
5. DEATH OR DISABILITY.
In the event of the termination of Executive's employment by reason of
death or Permanent Disability (as herein defined) the Executive (or his estate,
if applicable) shall be entitled to compensation and benefits under Section 3
through the date of termination, which is the date of death or the date
Executive commences to receive permanent disability benefits under the Company's
disability insurance program. Executive shall also be entitled to receive a PRO
RATA portion of any bonus paid for the year of termination payable at such time
as payments are generally made under the bonus plan and subject to the
attainment of the performance goals thereunder. The Executive (or his estate or
guardian) shall have no further right to receive any other compensation or
benefits after such termination except as may be determined in accordance with
the terms of the Company's employee benefit plans or programs. For purposes of
this agreement, "permanent disability" means a physical or mental disability or
infirmity of the Executive which prevents the normal performance of
substantially all of his duties as an employee of the Company, which disability
or infirmity shall exist, or in the opinion of an independent physician is
reasonably likely to exist, for any continuous period of 180 days or days
aggregating 180 days in any one year period.
6. CONFIDENTIALITY.
A. CONFIDENTIAL INFORMATION. "Confidential Information" means
information in whatever form, including information that is written,
electronically stored, orally transmitted, or memorized, which has a commercial
value to the Company and which is created, discovered, developed, or otherwise
becomes known to the Company, or in which property rights are held, assigned to
or otherwise acquired by or conveyed to the Company, including any system,
method, technique, research and development, technology, software, technical
information, trade secret, trademark, copyrighted material, reports, records,
documentation, data, customer or supplier lists, tax or financial information
(including the revenues, profits, and costs associated
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with any of the Company's products or services), business or marketing plans,
strategy, pricing information or forecasts. Confidential Information does not
include information which becomes generally known within the Company's industry
through no act or omission by Executive.
B. OWNERSHIP; DISCLOSURE. Any Confidential Information, whether or not
developed by Executive, shall at all times be the Company's exclusive property.
Executive shall, upon termination of employment, return the original and any
copy of Confidential Information to the Company.
C. RESTRICTION. During the term of this Agreement, and at any time
thereafter Executive shall not without the Company's prior written consent
specifically referring to this covenant,
(1) use any Confidential Information for the benefit of
himself or any other party other than the Company or disclose it to any
other person or entity;
(2) remove Confidential Information or documentation, device,
plan, or other records pertaining to Company's business from the
Company's premises, except when specifically authorized to do so in
pursuit of the Company's business; or
(3) retain copies or other records of any such items.
D. PURPOSE. The parties acknowledge and agree that the Confidential
Information is a valuable business asset, and this section is necessary to
protect the Company's legitimate business interests.
7. COVENANT NOT TO COMPETE/NON-SOLICITATION.
A. COVENANT. During the time of his employment and for a period of two
years following termination of employment, subject to the last sentence of this
Section 7(A), the Executive shall not, without prior written consent of the
Company, which in its exclusive discretion it may withhold, directly or
indirectly, for any reason:
(1) engage in, assist, or have any interest in, including
without limitation as a principal, consultant, employee, owner,
shareholder, director, officer, partner, member, advisor, agent or
financier, any activity which is in competition with the Company where
the Company does business; provided, this subsection shall not prohibit
investment by the Executive not exceeding five percent (5%) of the
outstanding securities of a publicly traded company so long as he does
not serve as an employee, director or consultant with respect to any
activities of such corporation which are in competition with the
Company where the Company does business;
(2) directly or indirectly influence any of the Company's
employees, officers, agents, or consultants to terminate their
employment or relationship with the Company or accept employment or a
business relationship with any of the Company's competitors;
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(3) interfere with or solicit for any purpose contrary to the
best interests of the Company any of the Company' s contracts or
business relationships, including without limitation those with
customers, suppliers, consultants, attorneys, or other agents, whether
evidenced by written or oral agreement; or
(4) at no time during or after termination of employment shall
Executive or the Company utter, issue or circulate any false,
inappropriate or disparaging statements, remarks or rumors about each
other unless giving truthful testimony under subpoena.
Notwithstanding the foregoing, Section 7(A)(1) shall not apply following the
Company's termination of Executive's employment without Cause, the Executive's
resignation with Good Reason, either party's non-renewal by delivery of a
Nonrenewal Notice, or in any event after a Change in Control. For purposes of
Sections 6 and 7 of this Agreement, the "Company" shall mean the Company
together with its subsidiaries.
B. EXTENSION OF RESTRICTED PERIOD. The period of applicability of
Section 7(A) shall be extended an additional day for each day on which Executive
is in breach of Section 7(A).
8. REMEDIES.
A. IRREPARABLE HARM. The parties acknowledge and agree that irreparable
harm would result in the event of a threatened or actual material breach by
either party of Section 6 or 7 of this Agreement. Therefore, in such an event,
and notwithstanding any other provision of this Agreement,
(1) The non-breaching party shall be entitled to a restraining
order, order of specific performance, or other injunctive relief,
without showing actual damage and without bond or other security;
(2) The Company's obligation in making payment or providing
any benefit under this Agreement, including without limitation any
severance benefits, shall immediately cease upon the Company's
obtaining an order or ruling described in Section 4(A)(2) of this
Agreement.
(3) If the Executive breaches Section 7 of this Agreement the
parties agree that the Company may seek relief in any court having
jurisdiction of the dispute and shall be entitled to an injunction to
enforce Section 7 for a period of two (2) years following the
Executive's last breach.
B. REMEDIES NOT EXCLUSIVE. Neither party's remedies hereunder are
exclusive, they shall not prejudice or prohibit any other rights or remedies
under this Agreement or otherwise. To the extent required to be enforced by
applicable law, the cessation of the Company's obligations to make payments and
continue benefits under this Agreement shall deemed to be in the nature of
liquidated damages and not a penalty. If for any reason, it is held that the
restrictions under Section 6 or 7 are not reasonable or that consideration
therefor is inadequate,
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such restrictions shall be interpreted or modified to include as much of the
duration and scope identified in Section 6 or 7 as will render such restrictions
valid and enforceable.
9. ADDITIONAL PAYMENT.
A. GROSS-UP PAYMENT. Notwithstanding anything herein to the contrary,
if it is determined that any Payment (as defined below) would be subject to the
excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as
amended (the "Code") or any interest or penalties with respect to such excise
tax (such excise tax, together with any interest or penalties thereon, is herein
referred to as an "Excise Tax"), then Executive shall be entitled to an
additional payment (a "Gross-Up Payment") in an amount that will place Executive
in the same after-tax economic position that Executive would have enjoyed if the
Excise Tax had not applied to the Payment. The amount of the Gross-Up Payment
shall be determined by the Accounting Firm (as defined below) in accordance with
the formula {(E x (1 - M)/(1 - T)) - E} (or such other formula as the Accounting
Firm deems appropriate which is intended to achieve the same result), where
E equals the Payments which are determined to be "excess
parachute payments" within the meaning of Section 280G(b)(1) of the
Code;
M equals the sum of the highest marginal rates(1) for Taxes
(as defined below) applicable to Executive at the time of the Payment;
and
- ---------------
(1) To be expressed in up to three decimal places. For example, a combined
federal, state and local marginal rate of 56% would be expressed as .560
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T equals M plus the rate of Excise Tax applicable to the
Payment.
No Gross-Up Payments shall be payable hereunder if the Accounting Firm
determines that the Payments are not subject to an Excise Tax.
B. DETERMINATION OF GROSS-UP PAYMENT. Subject to the provisions of
Section 9(C), all determinations required under this Section 9, including
whether a Gross-Up Payment is required, the amount of the Payments constituting
excess parachute payments, and the amount of the Gross-Up Payment, shall be made
by the Accounting Firm, which shall provide detailed supporting calculations to
both Executive and the Company within fifteen days of the Change in Control
Date, Executive's Date of Termination or any other date reasonably requested by
Executive or the Company on which a determination under this Section 9 is
necessary or advisable. The Company shall pay to Executive the initial Gross-Up
Payment within 5 days of the receipt by Executive and the Company of the
Accounting Firm's determination. If the Accounting Firm determines that no
Excise Tax is payable by Executive, the Company shall cause the Accounting Firm
to provide Executive with an opinion that the Accounting Firm has substantial
authority under the Code and Regulations not to report an Excise Tax on
Executive federal income tax return. Any determination by the Accounting Firm
shall be binding upon Executive and the Company. If the initial Gross-Up Payment
is insufficient to cover the amount of the Excise Tax that is ultimately
determined to be owing by Executive with respect to any Payment (hereinafter an
"Underpayment"), the Company, after exhausting its remedies under Section 9(C)
below, shall promptly pay to Executive an additional Gross-Up Payment in respect
of the Underpayment.
C. PROCEDURES. Executive shall notify the Company in writing of any
claim by the Internal Revenue Service that, if successful, would require the
payment by the Company of a Gross-Up Payment. Such notice shall be given as soon
as practicable after Executive knows of such claim and shall apprise the Company
of the nature of the claim and the date on which the claim is requested to be
paid. Executive agrees not to pay the claim until the expiration of the
thirty-day period following the date on which Executive notifies the Company, or
such shorter period ending on the date the Taxes with respect to such claim are
due (the "Notice Period"). If the Company notifies Executive in writing prior to
the expiration of the Notice Period that it desires to contest the claim,
Executive shall: (i) give the Company any information reasonably requested by
the Company relating to the claim; (ii) take such action in connection with the
claim as the Company may reasonably request, including, without limitation,
accepting legal representation with respect to such claim by an attorney
reasonably selected by the Company and reasonably acceptable to Executive; (iii)
cooperate with the Company in good faith in contesting the claim; and (iv)
permit the Company to participate in any proceedings relating to the claim.
Executive shall permit the Company to control all proceedings related to the
claim and, at its option, permit the Company to pursue or forgo any and all
administrative appeals, proceedings, hearings, and conferences with the taxing
authority in respect of such claim. If requested by the Company, Executive
agrees either to pay the tax claimed and sue for a refund or contest the claim
in any permissible manner and to prosecute such contest to a determination
before any administrative tribunal, in a court of initial jurisdiction and in
one or more appellate courts as the Company shall determine; PROVIDED, HOWEVER,
that, if the Company directs Executive to pay such
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claim and pursue a refund, the Company shall advance the amount of such payment
to Executive on an after-tax and interest-free basis (the "Advance"). The
Company's control of the contest related to the claim shall be limited to the
issues related to the Gross-Up Payment and Executive shall be entitled to settle
or contest, as the case may be, any other issues raised by the Internal Revenue
Service or other taxing authority. If the Company does not notify Executive in
writing prior to the end of the Notice Period of its desire to contest the
claim, the Company shall pay to Executive an additional Gross-Up Payment in
respect of the excess parachute payments that are the subject of the claim, and
Executive agrees to pay the amount of the Excise Tax that is the subject of the
claim to the applicable taxing authority in accordance with applicable law.
D. REPAYMENTS. If, after receipt by Executive of an Advance, Executive
becomes entitled to a refund with respect to the claim to which such Advance
relates, Executive shall pay the Company the amount of the refund (together with
any interest paid or credited thereon after Taxes applicable thereto). If, after
receipt by Executive of an Advance, a determination is made that Executive shall
not be entitled to any refund with respect to the claim and the Company does not
promptly notify Executive of its intent to contest the denial of refund, then
the amount of the Advance shall not be required to be repaid by Executive and
the amount thereof shall offset the amount of the additional Gross-Up Payment
then owing to Executive.
E. FURTHER ASSURANCES. The Company shall indemnify Executive and hold
Executive harmless, on an after-tax basis, from any costs, expenses, penalties,
fines, interest or other liabilities ("Losses") incurred by Executive with
respect to the exercise by the Company of any of its rights under this Section
9, including, without limitation, any Losses related to the Company's decision
to contest a claim or any imputed income to Executive resulting from any Advance
or action taken on Executive's behalf by the Company hereunder. The Company
shall pay all reasonable legal fees and expenses incurred under this Section 9,
and shall promptly reimburse Executive for the reasonable expenses incurred by
Executive in connection with any actions taken by the Company or required to be
taken by Executive hereunder. The Company shall also pay all of the fees and
expenses of the Accounting Firm, including, without limitation, the fees and
expenses related to the opinion referred to in Section 9(B).
F. DEFINITIONS. "ACCOUNTING FIRM" shall mean Ernst & Young or, if such
firm is unable or unwilling to perform such calculations, such other national
accounting firm as shall be designated by agreement between Executive and the
Company.
"CHANGE IN CONTROL DATE" shall mean the date on which the Change in
Control occurs.
"EQUITY PLANS" means the Company's Amended and Restated Stock Option
Plan, the Company's 1997 Equity Incentive Plan, as each may be amended from time
to time and any successor plans.
"PAYMENT" means (i) any amount due or paid to Executive under this
Agreement, (ii) any amount that is due or paid to Executive under any plan,
program or arrangement of the Company and its subsidiaries (including, without
limitation, the Equity Plans) and (iii) any amount or benefit that is due or
payable to Executive under this Agreement or under any plan, program or
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arrangement of the Company and its subsidiaries not otherwise covered under
clause (i) or (ii) hereof which must reasonably be taken into account under
Section 280G of the Code and the Regulations in determining the amount the
"parachute payments" received by Executive, including, without limitation, any
amounts which must be taken into account under the Code and Regulations as a
result of (A) the acceleration of the vesting of any option, restricted stock or
other equity award granted under the Equity Plans or otherwise, (B) the
acceleration of the time at which any payment or benefit is receivable by
Executive or (C) any contingent severance or other amounts that are payable to
Executive.
"REGULATIONS" shall mean the proposed, temporary and regulations under
Section 280G of the Code or any successor provision thereto.
"TAXES" shall mean the federal, state and local income taxes to which
Executive is subject at the time of determination, calculated on the basis of
the highest marginal rates then in effect, plus any additional payroll or
withholding taxes to which Executive is then subject.
G. ALTERNATIVE TO THE GROSS-UP PAYMENT. Notwithstanding anything to the
contrary in this Agreement, Executive hereby agrees that the Payments to be made
to Executive shall be reduced (and no Gross-up Payment will be paid to
Executive) so that none of the Payments constitute "parachute payments" within
the meaning of Section 280G(b)(2) of the Code, if, and only if, the Accounting
Firm determines that such reduction would result in the aggregate after excise
tax (but before income tax) value of the Payments so reduced being no more than
$20,000 less than the after excise tax (but before income tax) value of the sum
of the Payments and the relevant Gross-up Payment (assuming that the Payments
had not been reduced and a Gross-up Payment was paid to Executive).
10. ARBITRATION.
A. Any dispute or controversy arising under or in connection with this
Agreement and any claim by Executive that the Company breached any statutory or
common law duty to Executive (including but not limited to the law of tort,
contract, and all federal, state or local laws prohibiting employment
discrimination because of race, color, religion, sex, national origin, age,
veteran's status, or disability) that cannot be mutually resolved by the parties
hereto shall be settled exclusively by arbitration in Louisville, Kentucky
before one arbitrator of exemplary qualifications and stature, who shall be
selected jointly by the Company and the Executive, or, if the Company and the
Executive cannot agree on the selection of the arbitrator, shall be selected by
the American Arbitration Association (provided that any arbitrator selected by
the American Arbitration Association shall not, without the consent of the
parties hereto, be affiliated with the Company or the Executive or any of their
respective affiliates). Judgment may be entered on the arbitrator's award in any
court having jurisdiction. The parties hereby agree that the arbitrator shall be
empowered to enter an equitable decree mandating specific enforcement of the
terms of this Agreement, or in the event the arbitrator is resolving a dispute
over the breach of a statutory or common law duty, the parties agree that the
arbitrator shall be empowered to fashion a remedy that would have been available
had the matter been litigated in a judicial or administrative proceeding. The
Company shall bear all expenses of the arbitrator incurred in any arbitration or
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any court costs incurred in any court proceeding hereunder and shall promptly
reimburse the Executive (within 30 days of invoice) for any related reasonable
legal fees and out-of-pocket expenses directly attributable to such arbitration
or any court proceeding related to this Agreement; provided that such legal fees
are calculated on an hourly, and not on a contingency fee, basis; and, that the
Executive shall bear all expenses of the arbitrator and all of his legal fees
and out-of-pocket expenses (and reimburse the Company for its portion of such
expenses) if the arbitrator or relevant trier-of-fact determines that the
Executive's claim or position was frivolous and without reasonable foundation.
B. The parties agree that this requirement to arbitrate shall not apply
to any suit by either party seeking an injunction and/or damages for violation
of Sections 6 and/or 7 of this Agreement, it being specifically understood that
such claims arising under Sections 6 or 7 may be enforced in the first instance
in any court having jurisdiction of the parties.
C. If either party appeals the decision of the arbitrator, each party
shall bear its own expenses until the outcome of such appeal has been
determined, whereupon the prevailing party's expenses, including reasonable
legal fees, shall be reimbursed promptly by the other party.
11. MISCELLANEOUS.
A. NOTICES. All notices or communications hereunder shall be in
writing addressed as follows:
To the Company:
ARM Financial Group, Inc.
515 West Market Street
Louisville, Kentucky 40202-3271
Telecopier No.: (502) 582-7903
Attention: General Counsel
To the Executive:
ARM Financial Group, Inc.
515 West Market Street
Louisville, Kentucky 40202-3271
Telecopier No.: (502) 582-7903
or to such other address as either party may have furnished to the other in
writing in accordance herewith. All notices shall be conclusively deemed to be
received and shall be effective, (i) upon receipt if hand delivered; (ii) if
sent by telecopy or facsimile transmission, upon confirmation of receipt by the
sender of such transmission; or (iii) if sent by registered or certified mail,
on the fifth day after the day on which such notice is mailed.
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B. SEVERABILITY. Each provision of this Agreement shall be interpreted
in such manner as to be effective and valid under applicable law, but if any
provision of this Agreement is held to be prohibited by or invalid under
applicable law, such provision will be ineffective only to the extent of such
prohibition or invalidity, without invalidating the remainder of such provision
or the remaining provisions of this Agreement.
C. ASSIGNMENT. The Company's rights and obligations under this
Agreement shall not be assignable by the Company except as incident to a
reorganization, merger or consolidation, or transfer of all or substantially all
of the Company's business and properties (or portion thereof in which the
Executive is employed). Neither this Agreement nor any rights hereunder shall be
assignable or otherwise subject to hypothecation by the Executive. Nothing
herein is intended to affect the provisions of Sections 4(A)(3) and 5.
D. ENTIRE AGREEMENT. Except as expressly set forth herein, this
Agreement represents the entire Agreement of the parties concerning the subject
matter hereof and shall supersede any and all previous contracts, arrangements
or understandings between the Company and the Executive, including, without
limitation, the 1997 Agreement. This Agreement may be amended at any time by
mutual written agreement of the parties hereto. The parties expressly disclaim
that there were any representations or other understandings made to the other as
an inducement to enter into this Agreement except those that appear within this
Agreement.
E. WITHHOLDING. The payment of any amount pursuant to this Agreement
shall be subject to applicable withholding and payroll taxes, and such other
deductions as may be required under the company's employee benefit plans, if
any.
F. GOVERNING LAW. This Agreement shall be governed by and in accordance
with the laws of the Commonwealth of Kentucky.
IN WITNESS WHEREOF, the Company has caused this Agreement to be duly
executed and the Executive has hereunto set his hand, as of the day and year
first above.
ARM FINANCIAL GROUP, INC.
By: /s/ Martin H. Ruby
-------------------------------
Name:
-------------------------------
Title:
EXECUTIVE
By: /s/ Edward L. Zeman
-------------------------------
Name: Edward L. Zeman
<PAGE>
Exhibit 10.43
THIS LEASE
MADE AS OF THIS 28 day of January, 1999 between HUBCO, Inc., a New
Jersey Banking Corporation having its principal place of business at 1000
MacArthur Boulevard, Mahwah, N.J. 07430, hereinafter referred to as the
"LANDLORD", and NATIONAL INTEGRITY LIFE INSURANCE COMPANY, INC., a
corporation of the State of New York, located at 35 Matthews Avenue, Goshen,
New York, hereinafter referred to as the "TENANT",
WITNESSETH:
ARTICLE I - PREMISES
The LANDLORD, in consideration of the rents, covenants, agreements
and stipulations hereinafter set forth demises and leases to the TENANT and
TENANT hereby agrees to lease and take, upon the terms and conditions
hereinafter set forth, those certain premises existing and described on
Schedule A, commonly known as a portion of the second floor, 35 Matthews
Street, Goshen, New York. Said rental area shall consist of approximately
4,225 square feet and is hereinafter called the "Premises," or the "premises."
The use and occupation by the TENANT of the premises shall include
the use in common with others entitled thereto of the common areas (such as
lavatories, elevator, hallways, entryways, stairways), sidewalks, and other
facilities as may be designated from time to time by the Landlord, subject,
however, to the terms and conditions of this lease.
ARTICLE II - TERM
The term of this Lease and TENANT's obligation to pay rent
hereunder shall commence on or about January 1, 1999. Both parties will
execute a Commencement Letter verifying the actual commencement date of this
lease. The term of this Lease shall end on the last day of the fifth
consecutive full lease year as said term "lease year" is hereinafter defined,
on December 31, 2003.
The term "lease year" as used herein shall mean a period of twelve
(12) consecutive full calendar months. The first lease year shall begin on
the date of commencement of the term hereof if the date of commencement of
the term hereof shall occur on the first day of a calendar month; if not,
then the first lease year shall commence upon the first day of the calendar
month next following the date of commencement of the term hereof. Each
succeeding lease year shall commence upon the anniversary date of the first
lease year.
(1)
<PAGE>
ARTICLE III - RENT
(A) LANDLORD reserves and TENANT covenants to pay to LANDLORD
without demand, at HUBCO, Inc., 1000 MacArthur Boulevard, Mahwah, New Jersey
07430, Attention: Facilities Manager, or at such other place as may hereafter
be designated in writing by LANDLORD, on the days and in the manner herein
prescribed for the payment thereof, rent for the Premises as follows:
During Years One and Two of the lease, a fixed guaranteed minimum
annual rent, herein called "Minimum ANNUAL Rent" of $65,487.50 ($15.50 psf)
is due and payable in equal monthly installments of $5,457.30 Dollars, on the
first day of each month. During Years Three, Four, and Five, the fixed
guaranteed Minimum Annual Rent will be $69,712.50, ($16.50 psf) due and
payable in equal monthly installments of $5,809.37, on the first day of each
month.
In addition to the fixed guaranteed Minimum Annual Rent, Tenant
shall pay to Landlord an amount equal to $1.50 psf annually for electricity,
as noted in Article V. For all other operating expenses and real estate
taxes, Tenant shall pay its proportionate share (10.3%) of the increase in
operating expenses and real estate taxes over the base year, the base year
being 1999. Tenant's proportionate share of operating expenses (including
electricity) and real estate taxes shall be deemed Additional Rent, and shall
also be due and payable on the first day of each month.
In the event the monthly Minimum Annual Rent payment, or additional
rent as hereinafter established, is not received by LANDLORD within five (5)
days of its due date, then a late charge shall be incurred by TENANT in the
amount of seven (7%) percent of the aggregate payment then due. Said late
charge shall be cumulative for each late payment, and shall be paid at the
next monthly payment.
ARTICLE IV - USE
The premises shall be used and occupied by TENANT as a sales
office, for the purpose of marketing life insurance, annuities, and other
financial products only, and for no other purpose, and such use and occupancy
shall be in compliance with all applicable laws, orders, ordinances,
requirements and regulations of any governmental authority having
jurisdiction. It shall be TENANT's responsibility to secure a certificate of
use from Municipality, if same be required, or any other required
governmental permits, at its sole cost and expense.
TENANT agrees to keep and maintain the Premises as an attractive
area both in its physical characteristics and appearance, subject only to
ordinary use, wear and tear and occupancy.
(2)
<PAGE>
TENANT shall keep the area in front of and around the Premises free from
any unreasonable obstructions, dirt, refuse and debris of any kind and shall
keep the Premises and the exterior and interior of all windows, doors and all
other glass or plate glass fixtures in a neat and clear condition, reasonable
wear and tear excepted.
ARTICLE V - UTILITIES
TENANT shall be responsible for the payments to the Landlord for
electricity, in the amount of $1.50 psf annually, $528.12 monthly, payable as
Additional Rent, on the first day of each month. In no event shall LANDLORD
be liable for an interruption or failure in the supply of any utilities to
the Premises, unless caused by or resulting from Landlord's negligence or
willful misconduct.
It is expressly agreed that heating and cooling will only be provided
to the demised premises between the hours of 7:00 a.m. and 8:00 p.m. Monday
through Friday. No heating or cooling shall be provided on weekends, legal
holidays or during other weekend hours.
ARTICLE VI - REPAIRS
(A) LANDLORD:
Except as hereinafter provided to the contrary, LANDLORD shall attend to
all necessary repairs to the roof, to maintenance of the exterior of the
building and the Premises, to keep the plumbing and sewage system outside of
the Premises in good order, condition and repair and to make necessary
structural repairs. All other maintenance affecting the premises shall be the
responsibility and direct expense of TENANT, unless caused by or resulting
from Landlord's negligence of willful misconduct.
(B) TENANT
TENANT shall keep the Premises in good repair and in a clean and
sanitary condition, free from rubbish, inflammable or other objectionable
materials and shall repair, redecorate, paint and renovate the Premises
(including any exterior portions thereof installed and/or constructed by
TENANT) as may be necessary to keep the Premises in proper condition and good
repair, reasonable wear and tear excepted. TENANT, in addition, shall make
any and all other repairs to the Building, the Premises and facilities
required as a result of the misconduct, negligence, abuse or misuse of the
Building, the Premises and facilities by TENANT, its agents, servants,
employees of invitees. If TENANT refuses or neglects to commence repairs
within ten (10) days after written demand, or adequately to complete such
repairs within a reasonable time thereafter, LANDLORD may make the repairs
(but shall be under no obligation to do so) without liability
(3)
<PAGE>
to TENANT for any loss of damage that may accrue to TENANT's business by
reason thereof, unless caused by or resulting from Landlord's negligence or
willful misconduct, and if LANDLORD makes such repairs, TENANT shall pay to
LANDLORD on demand, the cost thereof. Without limiting the generality of
TENANT's undertaking as above stated, TENANT agrees to maintain and repair
all fixtures, interior walls, floors, ceilings, permitted signs and all
interior appliances in the Premises, and to replace all damaged glass and
glass windows in the Premises, unless such glass or glass windows are on the
exterior of the Premises or such damage is caused by Landlord's negligence or
misconduct.
TENANT wishes to utilize a rolling filing system that is currently
permanently affixed to the Premises, and LANDLORD grants permission for
TENANT to utilize the system, however, LANDLORD makes no representations or
warranties regarding the age, condition, working order, suitability, safety
or advisability of the system, and bears no liability to the users of the
system. The cost of repairs or maintenance of this rolling filing system
shall solely be the responsibility of the TENANT.
(C) COMMON AREAS:
LANDLORD shall provide snow removal service to the entire paved portion
of the land and sidewalks during seasonal periods of accumulations of ice and
snow. Said snow removal service shall provide expeditious removal when
accumulations of ice or snow are in excess of three (3") inches. LANDLORD
shall also provide electrical fixtures and lighting of common areas. LANDLORD
shall keep all common paved areas properly maintained and repaired.
ARTICLE VII - ALTERATIONS
TENANT shall make no alterations, decorations, installations, additions
or improvements in or to the Premises without LANDLORD's prior written
consent, which consent shall not be unreasonably withheld, and then only by
contractors or mechanics approved by LANDLORD. All such work, alterations,
decorations, installations, additions or improvements shall be done at
TENANT's sole cost and expense. All alterations, decorations, installations,
additions or improvements upon the Premises, made by either party (excepting
only TENANT's moveable fixtures) shall, unless LANDLORD shall elect
otherwise, (which election shall be made by giving a notice not less than
thirty (30) days prior to the expiration or other termination of this Lease
or any renewal or extension thereof) become the property of LANDLORD, and
shall remain upon, and be surrendered with, the Premises as a part thereof at
the end of the term. In the event LANDLORD shall elect otherwise, as to any
such alterations, decorations, installations, additions or improvements made
by TENANT upon the Premises, the same shall be removed by TENANT and TENANT
shall restore the Premises to the condition existing immediately prior to
such alterations, decorations, installations, additions or improvements and
such removal and restoration shall be at TENANT's own cost and expense.
(4)
<PAGE>
No signs of any kind shall be erected, painted on windows or doors, or
be displayed in any manner without the prior written consent of LANDLORD,
which shall not be unreasonably withheld.
ARTICLE VIII - INSURANCE INDEMNITY
TENANT shall not do anything in or about the Premises, which will in any
way impair or invalidate the obligation of any policy of insurance on or in
reference to the Premises or the Building.
(A) During the entire term of this Lease or any extension thereof,
TENANT shall keep in full force and effect, at its expense, a policy or
policies of public liability insurance issued by an insurer or insurers
approved by LANDLORD, with respect to the Premises and the business of TENANT
and any subtenant, licensees or concessions on terms approved in writing by
LANDLORD, in which both TENANT and LANDLORD shall be covered under reasonable
limits of liability of not less than FIVE HUNDRED THOUSAND and 00/100
($500,000.00) DOLLARS for injury or death to any one (1) person and ONE
MILLION and 00/100 ($1,000,000.00) DOLLARS for injury or death to more than
one (1) person, and ONE HUNDRED THOUSAND and 00/100 ($100,000.00) DOLLARS
with respect to property damage.
(B) TENANT shall furnish LANDLORD with certificates of coverage issued
by the insurance carriers providing coverage to LANDLORD as hereinabove
provided and such insurance policies and certificates issued to LANDLORD by
the insurers as evidence of such coverage shall be endorsed substantially as
follows:
"It is understood and agreed that the insurer will give to the LANDLORD,
thirty (30) days prior written notice of any material change in or
cancellation of this policy."
Renewal policies or certificates evidencing such insurance shall be furnished
at least ten (10) days prior to the expiration of the respective insurance
policies. Tenant shall provide to Landlord, annually, a renewed and valid
Certificate of Insurance showing at least the above-mentioned limits of
coverage, and naming Landlord as an additional insured.
(C) TENANT agrees that the use by itself, its agent, contractors,
employees, invitees and servants of the Premises and the Building and the
facilities therein is at its own risk and hereby releases LANDLORD and its
agents, servants, contractors and employees from all claims and demands of
every kind resulting from any accident, damage or injury occurring therein
except if such claim should arise from the LANDLORD'S negligence or willful
misconduct.
(5)
<PAGE>
(D) TENANT agrees to indemnify and save harmless the LANDLORD from and
against any and all claims and demands of third persons (including but not
limited to, those for death, for personal injuries, or for loss of or damage
to property) arising, directly or indirectly, out of or in connection with
the business conducted in the Premises or (without limiting the foregoing) as
a result of any acts, omissions or negligence of TENANT, or any
concessionaire, or their respective contractors, licensees, invitees, agents,
servants or employees in or about the Premises, and from and against all
costs, expenses and liability (including but not restricted to, reasonable
counsel fees and disbursements) occurring in or in connection with any such
claim or proceeding brought thereon, excluding claims resulting from
LANDLORD'S negligence or willful misconduct.
(E) LANDLORD shall not be responsible or liable to TENANT for any loss
or damage that may be occasioned by or through the acts or omissions of
persons occupying adjoining premises or any part of the premises adjacent to
or connected with the Premises or any part of the Building or of any persons
transacting any business in the Building or present in the Building for any
other purpose or for any loss or damage resulting to TENANT or its property
from any burst, stopped or leaking water, gas, sewer, sprinkler, steam or
other pipes or plumbing fixtures or from any failure of or defect in any
electric line, circuit or facility, unless caused by or resulting from
Landlord's negligence or willful misconduct.
(F) LANDLORD shall secure fire insurance and Standard Extended Coverage
in an acceptable amount so as to provide "full insurable value" on the entire
Building. The aggregate premium cost of such insurance coverage shall be pro
rated to TENANT as its proportionate share of Common Costs, and any increase
in premium over the base year of 1998, shall be payable monthly by Tenant as
Additional Rent, all as set forth in Article III.
(G) LANDLORD shall secure general liability insurance affecting the
common areas against claims for bodily injuries, death or property damage
pertaining to said common areas in the amounts of at least
$1,000,000.00/$3,000,000.00 and $500,000.00 for property damage. The
aggregate premium cost of such insurance coverage shall be pro rated to
TENANT as its proportionate share of common costs and shall be payable by
TENANT as Additional Rent all as set forth in Article III.
ARTICLE IX - DESTRUCTION OF PREMISES BY FIRE (TOTAL OR PARTIAL)
In the event of the total destruction of the Building or the Premises by
fire or other casualty, during the term hereby created or prior thereto, or
in the event of such partial destruction thereof as to render the Premises
wholly untenable or unfit for occupancy, then in either event, unless such
damage can, in the reasonable opinion of LANDLORD be repaired within ninety
(90) days after its occurrence, this Lease and the term hereby created shall
cease and become null and void from the date of such damage or destruction,
and TENANT shall upon
(6)
<PAGE>
written notice from LANDLORD, then immediately surrender the Premises and all
interest therein to LANDLORD, and TENANT shall pay rent within said term only
to the time of such damage or destruction. If, however, in LANDLORD's
reasonable opinion, the damage as aforesaid can be repaired within ninety(90)
days from the occurrence thereof, LANDLORD shall (unless LANDLORD shall elect
not to repair or rebuild, as hereinafter provided) repair the Premises with
all reasonable speed, and this Lease shall continue in full force and effect,
but all Rent payments hereunder shall abate from the occurrence of the
damage, until the completion of such repairs. If, however, such damage is due
to the fault or negligence of TENANT, TENANT's servants, agents, employees,
visitors or licensees, the damage shall be repaired by LANDLORD at Tenant's
expense, (unless LANDLORD shall elect not to repair or rebuild as hereinafter
provided) and this Lease shall continue in full force and effect, but there
shall be no such abatement of rent.
In the event of the partial destruction of the Building or Premises by
fire or other casualty, during the term hereby created or prior thereto,
which such partial destruction does not render the Premises wholly
untenantable or unfit for occupancy, LANDLORD shall (unless LANDLORD shall
elect not to repair or rebuild as hereinafter provided) repair the damage
with all reasonable speed, and this Lease shall continue in full force and
effect, but until the completion of such repairs the Minimum Annual Rent and
electricity payments shall abate in proportion to the area of the Premises
which is unusable by TENANT. If, however, such damage is due to the fault or
neglect of TENANT, TENANT's servants, agents, employees, visitors or
licensees, the damage shall be repaired by LANDLORD at Tenant's expense
(unless LANDLORD shall elect not to repair or rebuild as hereinafter
provided) and this Lease shall continue in full force and effect, but there
shall be no such abatement of rent.
In the event that the Building of the Premises shall be so lightly
damaged by fire or other casualty so as not to substantially affect the
operation of TENANT's business in the Premises, then in that event, there
shall be no abatement of rent and this Lease shall continue in full force and
effect, and LANDLORD shall enter and repair the damage with all reasonable
speed.
Notwithstanding anything contained herein to the contrary, if during the
last year of the term of this Lease the Premises or the Building shall be so
damaged by fire or other casualty that LANDLORD decides in its sole judgment
not to repair or rebuild, then LANDLORD may terminate this Lease and the term
hereby created by giving TENANT written notice of such termination within
sixty (60) days after the happening of such damage, and thereupon this Lease
and the term hereby created shall cease and terminate as of the date of the
happening of such damage, and rent and all other charges payable by TENANT
shall be pro rated to the day of such damage.
In case of any damage by fire or other casualty, TENANT shall
immediately notify LANDLORD.
(7)
<PAGE>
ARTICLE X - EMINENT DOMAIN
If substantially all of the Premises shall be taken by any public
authority under the power of eminent domain, then the term of this Lease
shall cease as of the day possession shall be taken by such public authority
and TENANT shall pay rent and all other charges only to the time of such
taking.
If more than one-third (1/3) of the Premises shall be taken under
eminent domain, TENANT shall have the right to terminate this Lease, or
subject to LANDLORD's right of termination as hereinafter in this Article set
forth, to continue in possession of the remainder of the Premises, and TENANT
shall notify LANDLORD in writing, within ten (10) days after such taking, of
TENANT's election.
In the event TENANT elects to remain in possession, all the terms herein
provided shall continue in effect and LANDLORD, at its own cost and expense,
shall make all necessary repairs and alterations to the basic building and
interior of the physical structure so as to constitute the remaining premises
a complete architectural unit. In such event, the Minimum Annual Rent shall be
reduced in proportion to the loss of floor area in the Premises. If, however,
the unexpired portion of the term of this Lease shall be three (3) years or
less at the date of the taking of any portion of the Premises or the Building
(without regard to the amount of space taken), LANDLORD may, by written notice
to TENANT, given within thirty (30) days after the date of such taking,
terminate this Lease and TENANT shall pay rent and all other charges only to
the time of such termination.
In any event, all damages and compensation for taking under the power
of eminent domain, whether for the whole or a part of the Premises, shall
belong to and be the property of LANDLORD, whether such damages shall be
awarded as compensation for diminution in value of the leasehold or of the
fee, and TENANT hereby sets over and assigns to LANDLORD any part of such
award awarded to it under such circumstances.
ARTICLE XI - ASSIGNMENT OR SUBLETTING, ETC.
TENANT agrees not to sell, assign, mortgage, pledge, or in any manner,
transfer this Lease or any estate or interest thereunder and not to sublet
the Premises or any part or parts thereof and TENANT further agrees not to
permit any license or concessionaire therein without the prior written
consent of LANDLORD in each instance, which shall not be unreasonably
withheld. If this Lease be assigned or transferred in any manner whatsoever,
such assignment or transfer shall be upon and subject to all of the
covenants, provisions and conditions contained in this Lease, and
notwithstanding any consent by LANDLORD to any such assignment or transfer or
any subletting by TENANT, TENANT shall continue to be and remain liable
hereunder. Any consent by LANDLORD to any such assignment, transfer,
subletting, license or concession or other matter or thing contained in this
Article shall not in any wise be construed to relieve
(8)
<PAGE>
TENANT from obtaining the prior consent of LANDLORD to any other or further
such assignment, transfer, subletting, license, concession, matter or thing.
All rental payments received by LANDLORD on account of assignment,
subletting or otherwise shall be the property of LANDLORD and paid to
LANDLORD as but in no event shall the Annual Minimum Rent or New Base Rent be
reduced by virtue of said assignment or subletting. In the event that the New
Base Rent paid by SubTenant is in excess of the Minimum Annual rent,
the parties agree that such excess shall be divided equally between Landlord
and Tenant.
ARTICLE XII - SURRENDER
On the last day of the term demised, of the sooner termination thereof,
TENANT shall peaceably surrender the Premises in good order, condition and
repair, broom-clean, damage by unavoidable casualty, fire and reasonable wear
and tear excepted. On or before the last day of the term or the sooner
termination thereof, TENANT shall, at its expense, remove its fixtures and
signs, unless otherwise directed by LANDLORD, from the Premises and any
property not removed shall be deemed abandoned and may be removed and
disposed of by LANDLORD and the expense of such removal shall be paid to
LANDLORD by TENANT without any set off for the salvage value of goods so
removed. If the Premises are not surrendered at the end of the term or the
sooner termination thereof, TENANT shall indemnify LANDLORD against loss or
liability resulting from delay by TENANT in so surrendering the Premises,
including without limitation, claims made by an succeeding tenant founded on
such delay. TENANT shall promptly surrender all keys for the Premises to
LANDLORD at the place then fixed for payment of rent.
ARTICLE XIII - DEFAULT
The following shall be considered events of default under this Lease:
(A) the Tenant defaults in the payment of said rents or of any installments
or part thereof, or in the payment of any other sum or any part thereof
which may become due from TENANT to LANDLORD hereunder, at the times and
in the manner provided herein, and remains in default for fifteen (15)
days after such sums becomes due, or in any violation under Article III,
or
(B) the Premises shall be deserted, abandoned or vacated, other than in
accordance with the terms set forth herein, or
(C) the violation by TENANT of any of the covenants, agreements and
conditions herein provided and the failure to cure such violation within
fifteen (15) days after notice, in writing, of such violation by
LANDLORD to TENANT.
(9)
<PAGE>
Then upon the happening of any such event of default, LANDLORD may, at its
option, elect either to terminate this Lease or to enter the said Premises as
the agent of TENANT, either by force or otherwise, without being liable for
any prosecution or damage therefore, and relet the Premises as the agent of
TENANT, and receive the rent therefor, upon such terms as shall be
satisfactory to LANDLORD, and all rights of TENANT to repossess the Premises
under this Lease shall cease and end upon such termination or entry. Such
entry for reletting by LANDLORD shall not operate to release TENANT from any
rent to be paid or covenants to be performed hereunder during the full term
of this Lease. For the purpose of reletting, LANDLORD shall be authorized to
make such repairs or alterations in or to the Premises as may be necessary to
place the same in good order and condition. TENANT shall be liable for and
hereby agrees to pay to LANDLORD the cost of such repairs or alterations and
all expenses of such reletting. If the sum realized or to be realized from
the reletting is insufficient to satisfy the rent provided in this Lease,
LANDLORD, at its option, may require TENANT to pay such deficiency month by
month (or at any greater intervals) or may hold TENANT in advance for the
entire deficiency resulting from such reletting. TENANT agrees to pay, as
Additional Rent, all reasonable attorney's fees and other expenses incurred
by LANDLORD in enforcing any of TENANT's obligations under this Lease. No
waiver by LANDLORD of any such breach, violation or default by TENANT shall
constitute or be construed as a waiver of any other such breach, violation or
default, nor shall lapse of time after such breach, violation or default by
TENANT before LANDLORD shall exercise any right with respect thereto operate
to defeat or adversely affect rights of LANDLORD.
ARTICLE XIV - INSOLVENCY OF TENANT
At any time prior to or during the term of this Lease, if TENANT shall
make an assignment for the benefit of its creditors; or if TENANT shall file
a voluntary petition in bankruptcy; or if the affairs of TENANT shall be
taken over by or pursuant to an order of any court or of any other officer or
governmental authority pursuant to any federal, state or other statute or
law; or if TENANT shall admit in writing its inability to pay debts generally
as they become due; or if TENANT shall file any petition or answer seeking
any reorganization, arrangement, composition, re-adjustment, liquidation,
dissolution or similar relief under the present or any future bankruptcy act
or any other present or future applicable federal, state or other other
statute or law; or such proceedings shall have not been dismissed; or if
within sixty (60) days after the appointment, without the consent or
acquiescence of TENANT, of any trustee, receiver, or liquidator of TENANT or
of all or any substantial part of its property, such appointment shall not
have been vacated or stayed on appeal or otherwise, or if, within sixty (60)
days after the expiration of any such stay, such appointment shall not have
been vacated; or in the event corporate action shall be taken by TENANT in
furtherance of any of the aforesaid purposes, then and in any such event,
LANDLORD may at its option terminate this Lease and all rights of TENANT
herein, by giving to TENANT notice in writing of the election of
(10)
<PAGE>
LANDLORD so to terminate, and in such event neither TENANT nor any person
claiming by, through or under TENANT by virtue of any statute or of an order
of any court shall be entitled to possession or to remain in possession of
the Premises but shall forthwith quit and surrender the Premises. Such causes
for the termination of this Lease as set forth in this Article shall
constitute a default by TENANT and all rights and remedies stated or
otherwise reserved under Article XIII hereof shall be available to LANDLORD.
ARTICLE XV - QUIET ENJOYMENT
TENANT, subject to the terms and provisions of this Lease, on payment of
the rent and observing, keeping and performing all of the terms and
provisions of this Lease, shall lawfully, peaceably and quietly have, hold,
occupy and enjoy the Premises during the term hereof subject, however, to all
the provisions of this Lease. It is understood and agreed that this covenant,
and any all other covenants of LANDLORD herein contained shall be binding on
LANDLORD only during its ownership of the Premises. In the event LANDLORD
shall sell or otherwise dispose of its interest in the Premises during the
term of this Lease, such sale or other disposition shall operate to release
and relieve LANDLORD from any further liability or obligation to TENANT
hereunder. It is further understood and agreed that with respect to any
services and/or facilities to be furnished by LANDLORD to TENANT, LANDLORD
shall in no event be liable for failure to furnish the same when prevented
from so doing by strikes, lockouts, breakdown, accident, order or regulation
of or by any governmental authority, or failure of supply, or inability, by
the exercise of reasonable diligence, to obtain supplies, parts or employees,
or because of war or other emergency, or for any cause beyond LANDLORD's
reasonable control, except for negligence and willful misconduct, and in no
event shall LANDLORD ever be liable to TENANT for any indirect, consequential
damage or punitive damages.
ARTICLE XVI - SECURITY DEPOSIT
Prior to the inception of this Lease, Tenant has deposited with LANDLORD
the sum of Ten Thousand Dollars ($10,000.00) to be held by LANDLORD, as
security, without interest, for and during the term of this Lease, which
deposit shall be returned to TENANT at the termination of this Lease provided
there has been no breach of the undertakings of TENANT. In no instance shall
the amount of such security deposit be considered as a measure of liquidated
damages. All or any part of the said deposit may be applied by LANDLORD
in total or partial satisfaction of any default by TENANT. The application of
all or any part of the deposit to any obligation or default of TENANT under
this Lease shall not deprive LANDLORD of any other rights or remedies
LANDLORD may have nor shall such application by LANDLORD constitute a waiver
by LANDLORD. If all or any part of the security deposit is applied to an
obligation of TENANT hereunder, LANDLORD shall have the right to call upon
TENANT to restore the said security deposit to its original amount by giving
notice to TENANT and TENANT shall immediately restore such security deposit
by payment thereof to LANDLORD. TENANT shall not have the right to call upon
LANDLORD to apply all or any part of the security deposit to
(11)
<PAGE>
cure any default or fulfill any obligation of TENANT, but such use shall be
solely in the discretion of LANDLORD. It is distinctly understood and agreed
that should LANDLORD convey its interest under this Lease, the said security
deposit may be turned over by LANDLORD to LANDLORD's grantee or transferee,
and upon any such delivery of the deposit, TENANT hereby releases LANDLORD
herein named of any and all liability with respect to the deposit, its
application and return, and TENANT agrees to look solely to such grantee or
transferee, and it is further understood that this provision shall also apply
to subsequent grantees and transferees.
ARTICLE XVII - HOLDING OVER
Any holding over by TENANT after the expiration of term of this Lease
shall not operate except by written agreement to extend or renew this Lease
or to imply or create a new Lease, but in such case LANDLORD's occupancy or
to the treatment of TENANT's occupancy as a month-to-month tenancy. If
TENANT's occupancy is treated as a month-to-month tenancy, then TENANT shall
pay a fixed monthly minimum rent of an amount equal to double the monthly
installment of the Minimum Annual Rent payable at the expiration of the
lease, which shall be paid in addition to the Additional Rent charges set
forth in this lease.
ARTICLE XVIII - MECHANIC'S LIENS
TENANT shall not suffer any mechanics' notice of intention, stop notice,
or lien to be filed against the Premises by reason of work, labor, services
or materials performed or furnished to TENANT or to anyone holding the
Premises through or under TENANT. If any such mechanics' notice of intention,
stop notice, or lien shall at any time be filed against the Premises, TENANT
shall forthwith cause the same to be discharged of record. If TENANT shall
fail to cause such mechanics' notice of intention, stop notice, or lien to
be discharged within thirty (30) days after being notified of the filing
thereof, then, in addition to any other right or remedy of LANDLORD, LANDLORD
may, but shall not be obligated to, discharge the same by paying the amount
claimed to be due, and the amount so paid by LANDLORD and/or all costs and
expenses, including reasonable attorneys' fees, incurred by LANDLORD in
procuring the discharge of such lien, shall be deemed to be Additional Rent
for the Premises and shall be due and payable by TENANT to LANDLORD on the
first day of the next following month. Nothing in this Lease contained shall
be construed as a consent on the part of LANDLORD to subject LANDLORD'S
estate in the Premises to any lien or liability under the Mechanics' Lien Law
of the State of New Jersey.
(12)
<PAGE>
ARTICLE XIX - NOTICES
Any notice required or permitted under this Lease shall, unless otherwise
specifically provided herein, be deemed sufficiently given or served if sent
by regular mail addressed to TENANT at the Premises, with a copy to ARM
Financial Group, 515 W. Market Street, Louisville, Kentucky 40202, Attn:
General Counsel, and to LANDLORD at the address then fixed for the payment of
rent. Any such notice shall be deemed given as of the date of mailing. Either
party may by like written notice at any time designate a different address to
which notices shall subsequently be mailed. Notices shall be mailed to the
following addresses:
As to the Landlord: Hubco, Inc.
Attn: Facilities Manager
1000 MacArthur Boulevard
Mahwah, NJ 07430
With a copy to: McBride Corporate Real Estate, National Services
851 Franklin Lake Road
Franklin Lakes, NJ 07417
ARTICLE XX - ACCESS TO PREMISES BY LANDLORD, ETC.
LANDLORD reserves the right to enter upon the Premises at reasonable
hours to inspect the same, or to make repairs, additions or alterations to
the Premises or other property, or to exhibit the Premises to prospective
tenants, purchasers or others, and to enter at any time in the event of an
emergency. With respect to the foregoing, Landlord shall use its best efforts
to minimize disruption of Tenant's business.
LANDLORD reserves the right to erect, use and maintain pipes, cables,
conduits, plumbing, vents and wires in, on and through the Premises to the
extent that LANDLORD may now or hereafter deem to be necessary or appropriate
for the proper operation and maintenance of the Building.
(13)
<PAGE>
ARTICLE XXI - ENVIRONMENTAL MATTERS
As a condition to leasing the premises, LANDLORD requires the TENANT to
make certain representations and provide certain indemnities concerning (i)
Hazardous Materials, as hereinafter defined, which may now exist on, in or
under the Premises or otherwise affect it as a result of TENANT'S occupancy,
(ii) violations of Environmental Laws, as hereinafter defined, with respect
to Premises; (iii) the release of Hazardous Materials from the Premises onto
any surrounding property, and (iv) claims for injury to the Premises or the
person or property of third parties as a result of Hazardous Materials
existing, on or released from, the Premises during TENANT'S use and occupancy
of the premises.
TENANT hereby certifies and promises that:
1. TENANT has not and will not use the premise for the generation,
manufacture, storage, treatment, discharge or disposal of Hazardous
Materials; and
2. The TENANT is in compliance with all Environmental Laws; and
3. To Tenant's knowledge, there is no pending or threatened claim,
action or proceeding by any governmental authority or third party
against or respecting the TENANT, or the Premises; and
4. To Tenant's knowledge, the Premises has not been used for activities
which require compliance with the Industrial Site Recovery Act.
TENANT hereby agrees at its sole cost and expense to indemnify, defend
and hold Landlord, its shareholders, directors, officers, employees of any of
its affiliates and any agents of representatives of the landlord
(collectively, the ""Indemnities'') harmless from and against any and all
Loss and Damage (as hereinafter defined) arising from or out of:
1. TENANT'S use of any Hazardous Materials existing on or after the
Tenant's occupancy of the Premises, or subsequent hereto at or under
the Premises; and
2. The failure of the TENANT to be in full compliance on the date
hereto with all Environmental Laws; and
(14)
<PAGE>
3. Any release of any Hazardous Materials by the TENANT from the
Premises onto any surrounding property; and
4. Any injury occurring to the person or property of third parties as a
result of the existence of Hazardous Materials in the Premises or
released from the Premises onto surrounding property; provided,
however, that such injury is caused by the release of Hazardous
Materials in or under the Premises by Tenant, and not by Landlord,
any of Landlord's other tenants, or any other person.
TENANT hereby agrees to indemnify and hold the landlord harmless from any
loss, costs or expense arising out of the enforcement of this Article XXI by
the TENANT or the assertion by LANDLORD of any defenses to its obligations
hereunder provided the LANDLORD prevails in any such action for enforcement
of this Article XXI.
As used in this Agreement:
(A) The term "Loss or Damage" shall mean and include all costs, losses,
damages, liabilities, obligations, penalties, litigation,
proceedings, claims, causes of action, demands, defense costs,
disbursements, judgements and the like, of whatever nature,
including but not limited to reasonable attorneys' fees, experts'
fees and other costs of litigation or administrative proceedings
including preparation therefore, as well as (i) the costs of removal
of any and all Hazardous Materials from all or any portion of the
Premises or surrounding areas, and (ii) additional costs required to
take necessary precautions to protect against the release of
Hazardous Materials on, in, under or affecting the Premises into the
air, any body of water, any other public domain or any surrounding
areas, and (iii) costs incurred to comply, in connection with the
Premises and surrounding areas, with all applicable Environmental
Laws; and
(B) The term "Environmental Laws" shall mean and include the
Comprehensive Environmental Response, Compensation and Liability Act
of 1980, 42 US C. 9601 ET SEQ., the Resource Conservation and
Recovery Act, 42 USC '6904, the Superfund Act (Hazardous Waste
Material Fund), New York Environmental Conservation Law, 72-04,
72-0923, 72-131, ET SEQ., the Oil Spill Prevention Control and
Compensation Act, New York Navigational Law, ET SEQ., and all other
similar existing and future federal, state and municipal statutes
and ordinances governing the environment, all as amended from time
to time, together with all rules, regulations, opinions, orders,
judgements and directives issued or promulgated pursuant to or in
connection with any of the foregoing by the New York Department of
Environmental Conservation, the US Environmental Protection, the
U.S. Environmental Protection Agency, any bureau or subdivision
thereof or any other governmental agency, court or entity having
jurisdiction; and
(15)
<PAGE>
(C) The term "Hazardous Materials" shall mean and include asbestos, any
hazardous or toxic materials, wastes and substances which are
defined, determined or identified as such in any Environmental Law
or any judicial or administrative interpretation thereof.
No delay on Landlord's part in exercising any right, power or privilege
shall operate as a waiver of any such privilege, power or right.
The promises and representations made in this Article shall survive the
expiration of the lease.
TENANT agrees to provide LANDLORD with copies of all annual State
inspection reports from initial occupancy of the premises to date and further
agrees to provide copies of future reports to LANDLORD immediately upon
receipt during the term of this lease.
Landlord warrants and represents that all Premises, the Building, and the
associated common areas and grounds are, or will be at the time of
commencement be and remain, in full compliance with all applicable federal,
state, and local laws and regulations respecting hazardous wastes, materials,
and emissions, or their production, storage, disposal or abatement
("Environmental Standards") as well as all Environmental Laws currently in
effect. Landlord will defend, indemnify and hold Tenant harmless from any and
all claims, demands, assessments, failure of this warranty, however, nothing
in the foregoing shall exculpate Tenant from liability for its own acts or
commissions causing any such failure of warranty. Notwithstanding anything
to the contrary, Landlord shall not include within operating costs or other
Additional Rent any costs or charges incurred in remedying any failure to
comply with Environmental Standards or Environmental Laws including, without
limitation, any associated legal defense costs, fines, or penalties.
ARTICLE XXII - TENANT'S WORK
All work necessary to prepare the Premises for the TENANT's use and
occupancy shall be done by the TENANT at TENANT'S sole cost and expense.
Before the commencement of any such work, the TENANT shall submit detailed
plans and specifications therefore to the LANDLORD and obtain the LANDLORD's
written approval therefore. LANDLORD also reserves the right to approve or
reject TENANT's proposed contractors. The TENANT of TENANT's contractor in the
performance of such work shall obtain and pay for all permits and
governmental authorities having jurisdiction thereof, and shall not interfere
with other work being done in the Building or adjacent to the Premises, and
shall comply with all rules the LANDLORD may make, and employ only contractors
approved by LANDLORD.
Prior to the commencement of any work, the TENANT's contractor shall
obtain and maintain at its own expense, Workmen's Compensation, Protective
Public Liability and Property Damage Insurance as will be acceptable to the
LANDLORD and furnish the LANDLORD with certificates of such insurance
indicating the LANDLORD as an insured.
(16)
<PAGE>
TENANT agrees that it will procure all necessary permits before
commencing such work. TENANT agrees to pay promptly when due the entire cost
of any work done by or for TENANT upon the Premises so that the Premises
shall at all times be free of liens for labor or materials. TENANT hereby
guarantees full completion of all TENANT's work hereunder in compliance with
this Lease and all applicable laws and ordinances.
ARTICLE XIII - PARKING
No parking spaces shall be for the exclusive use of TENANT. TENANT
shall not impair, hinder or otherwise utilize parking area for storage or any
other purpose other than parking.
ARTICLE XXIV - OPTION TO RENEW
Provided that Tenant shall not be in default of any terms, provisions,
conditions or covenants herein at the time of the exercise of the option set
forth in this Article XXIV, and at the time said option shall take effect,
and provided further that Tenant is substantially physically occupying the
Leased Premises as so to enable Tenant to carry out its business at the time
of the exercise of the option set forth in this Article XXIV, and at the time
said option takes effect, Tenant shall have the right to extend the term of
this Lease for an additional period of five (5) years commencing on the date
following the termination of the initial Term. Said option to extend the
Term shall be on the same terms, conditions, provisions and covenants as are
set forth herein, with the following exceptions:
(a) The Minimum Annual Rent during the option period shall be at Fair
Market Rent. The term "Fair Market Rent" shall mean the Minimum
Annual Rent, (real estate taxes and operating expenses and other
charges known as Additional Rent are excluded) per square foot of the
Premises as of the date the option period commences (Adjusted
Minimum Annual Rent), but in no event less than the Minimum Annual
Rent payable by Tenant immediately prior to the "Adjusted Minimum
Annual Rent." More specifically, it is defined as the Minimum Annual
Rent then being charged to tenants under any new leases being made
in the building or in comparable office buildings located in the
Goshen and Orange County office market, "the Area." In addition, in
determining the Fair Market Rent, no consideration shall be given to
the following facts: (1) that no vacancy or reletting expenses will
be incurred by Landlord (including without limitation, advertising
or promotional expenses; (2) that Landlord shall not perform work at
its expense for the Tenant or pay Tenant any special work allowance;
(3) that Landlord shall not grant any rent concession to Tenant; and
(4) that Tenant will not incur the cost and expense of (a) having
to locate other premises in which to move, (b) designing and
constructing improvements to same, (c) relocating to said new
premises, and (d) having its operations disrupted during the
relocation.
(17)
<PAGE>
(b) If the parties cannot agree upon the Fair Market Rent within 30 days
of Tenant's notice described in Article XXIV (B) herein, the Fair
Market Rent shall be determined by two commercial real estate
brokers, one selected by Landlord and one selected by Tenant, each
at their own expense. With fifteen (15) days following said 30-day
period described herein, Landlord and Tenant shall each notify the
other of its selection of a commercial real estate broker with a
minimum of five (5) years commercial real estate brokerage
experience. Said brokers shall work together to ascertain said
Fair Market Rent and shall each issue an opinion setting their
determination. If the retained brokers cannot agree on the Fair
Market Rent within seventy-five (75) days of Tenant's notice
described in Article XXIV (B) herein, they shall select, within
ninety days (90) of Tenant's notice described in Article XXIV (B),
a third broker with equal qualifications, whose costs and expenses
shall be borne equally by the parties, and whose decision as to
Fair Market Rent, which must be made, within sixty (60) days of
Tenant's notice described in Article XXIV (B) herein, shall be
final. All brokers shall be independent, third-party brokers
having at least five (5) years experience in commercial real estate
brokerage in the area and shall not have been or thereafter be
employed or retained by Landlord or any affiliate or Tenant or any
affiliate in connection with this Lease or any other matter for a
period of three (3) years and shall issue a written opinion setting
forth such determination of Fair Market Rent. All brokers shall be
instructed to follow and shall be bound by the directions outlined
in subparagraph (a) above in making their determinations.
(B) The right, option and privilege of the TENANT to renew this Lease
as hereinabove set forth is expressly conditioned upon the Tenant delivering
to the LANDLORD, in writing, sent certified mail, return receipt requested,
seven (7) month's prior notice of its intention to renew, which notice shall
be given to the LANDLORD by the TENANT no later than seven (7) months prior
to the date fixed for termination of the original term hereinbefore provided.
ARTICLE XXVI - GENERAL PROVISIONS
(A) This Lease does not create the relationship of principal and agent
or of partnership or of joint venture or of any association between LANDLORD
and TENANT, the sole relationship between LANDLORD and TENANT being that of
LANDLORD and TENANT.
(B) No waiver of any default of TENANT hereunder shall be implied from
any omission by LANDLORD to take any action on account of such default if
such default persists or is repeated, and no express waiver shall affect any
default other than the default specified in the express waiver and that only
for the time and to the extent therein stated. One or more waivers by
LANDLORD shall not be construed as a waiver of a subsequent breach of the
same covenant, term or condition. The receipt of rent by LANDLORD with
knowledge of the breach of any TENANT obligation under this Lease shall not
be deemed a waiver of such breach, unless such breach was for failure to pay
rent.
(18)
<PAGE>
(C) The consent to or approval by LANDLORD of any act by TENANT
requiring LANDLORD's consent or approval shall not waive or render
unnecessary LANDLORD's consent to or approval of any subsequent similar act
by TENANT.
(D) Each term and each provision of this Lease performable by TENANT
shall be construed to be both an covenant and a condition.
(E) No action required or permitted to be taken by or on behalf of
LANDLORD under the terms of provisions of this Lease shall be deemed to
constitute an eviction or disturbance of TENANT's possession of the
Premises, provided action is taken in accord with Article XIII.
(F) TENANT represents and agrees McBride Corporate Real Estate is the
sole broker in this transaction, and that it has not directly or indirectly
dealt with any other real estate broker in connection with this transaction.
TENANT agrees to hold LANDLORD harmless from and against any claim for
brokerage fees or commission from any other broker arising out of or in
connection with this Lease.
(G) Under no circumstances shall TENANT use any space outside the
premises for the conduct of its business operations.
(H) The submission of this Lease or a summary of some or all of its
provisions for examination does not constitute a reservation of or option for
the Premises, or an offer to Lease.
(I) The topical headings of the several articles, paragraphs and clauses
are not a part of this Lease, but are for convenience only and do not define,
enlarge, limit or construe any of the provisions hereof.
(J) This lease may not be changed or terminated nor may any provision
hereof be waived orally.
(K) The laws of the State of New York, without reference to New York
principles regarding the conflict of laws, shall govern the validity,
performance and enforcement of this Lease.
(19)
<PAGE>
It is understood and agreed that all prior contemporaneous
representations, statements, understandings and agreements, oral or written,
between the parties hereto are merged in this Lease, which alone fully and
completely expresses the parties agreement, and that this Lease is entered
into after a full consideration, no party relying on any statement or
representation or warranty not embodied in this lease.
All of the parties hereto hereby waive trial by jury in any action,
proceeding, or counterclaim involving any matter whatsoever arising out of,
or in any way connected with this Lease or the relationship of the parties
herein, or the right of any party to any relief or remedy.
(L) The invalidity of one or more phrases, sentences, clauses or
paragraphs contained in this Lease shall not affect the remaining portion of
this Lease or any part thereof, and in the event that any one or more of the
phrases, sentences, clauses or paragraphs contained in this Lease should be
declared invalid by the final order, decree or judgment of a court of
competent jurisdiction, this Lease shall be construed as if such invalid
phrases, sentences, clauses or paragraphs had not been inserted herein.
(M) TENANT shall not record this Lease.
(N) The terms conditions and covenants hereof shall be binding upon and
inure to the successors in interest of the parties hereto.
(O) TENANT will make any and all repairs and changes to the Premises
required by any and all applicable laws, ordinances, rules, regulations and
decrees of any public body with jurisdiction, which repairs or changes are
attributable to TENANT's use or possession of the Premises. All such changes
not attributable to the TENANT's use or possession of the Premises, or
attributable to the building as a whole, shall not be the responsibility of
the TENANT. However, TENANT agrees to cooperate with and not interfere in
the installation, construction, completion and continued maintenance of all
such repairs or changes to the Premises of the benefit of other tenants in
the Building or Buildings.
(P) TENANT shall place signage on the 2nd floor hallway and the lobby
area off parking lot, the copy the size to be subject to Landlord's approval,
which shall not be unreasonably withheld.
(20)
<PAGE>
IN WITNESS WHEREOF, the parties have signed their names and affixed
their seals the day and year first above written.
ATTEST:
NATIONAL INTEGRITY LIFE INSURANCE COMPANY
A Corporation of New York,
/s/ [Illegible] By: /s/ John R. Lindholm
- -------------------- --------------------------------------
Assistant Secretary Title: President
Date: 1/28/99
ATTEST: HUBCO, Inc.,
A Corporation of New Jersey
/s/ [Illegible] /s/ [Illegible]
- -------------------- --------------------------------------
Title: Executive Vice President
Date: 2/11/99
(21)
<PAGE>
EXHIBIT A
<PAGE>
[FLOOR PLAN]
EXHIBIT A
---------
PROPOSED SPACE FOR
ARM FINANCIAL GROUP AT
35 MATTHEWS ST., GOSHEN, NY
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
on Form S-8 (Securities and Exchange Commission Registration Numbers
333-36769, 333-59321, and 333-61775) of our reports dated February 9, 1999,
with respect to the consolidated financial statements and schedules of ARM
Financial Group, Inc. included in the Annual Report (Form 10-K) for the year
ended December 31, 1998.
/s/ Ernst & Young LLP
Louisville, Kentucky
March 16, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND STATEMENT OF INCOME OF ARM FINANCIAL GROUP, INC'S FORM 10K FOR THE
YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<DEBT-HELD-FOR-SALE> 5,812,330
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 31,745
<MORTGAGE> 14,554
<REAL-ESTATE> 0
<TOTAL-INVEST> 5,287,014
<CASH> 525,316
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 125,589
<TOTAL-ASSETS> 9,786,264
<POLICY-LOSSES> 6,600,498
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 38,000
0
75,000
<COMMON> 237
<OTHER-SE> 135,196
<TOTAL-LIABILITY-AND-EQUITY> 9,786,264
0
<INVESTMENT-INCOME> 480,423
<INVESTMENT-GAINS> (1,874)
<OTHER-INCOME> 21,581
<BENEFITS> 380,738
<UNDERWRITING-AMORTIZATION> 12,593
<UNDERWRITING-OTHER> 39,367
<INCOME-PRETAX> 58,880
<INCOME-TAX> 15,066
<INCOME-CONTINUING> 43,814
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 43,814
<EPS-PRIMARY> 1.59
<EPS-DILUTED> 1.53
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
