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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (date of earliest event reported): August 3, 1999
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ARM FINANCIAL GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 001-12294 61-1244251
(State or other jurisdiction of (Commission (I.R.S. Employer
incorporation or organization) file number) 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
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ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On August 3, 1999, ARM Financial Group, Inc. (the "Company") and General
American Life Insurance Company ("General American") completed a transaction
whereby General American recaptured approximately $3.4 billion of assets and
related liabilities previously ceded through a reinsurance agreement to one of
the Company's insurance subsidiaries, Integrity Life Insurance Company
("Integrity") (the "Transaction"). The Transaction, which terminated the
reinsurance and related agreements, including a marketing partnership agreement,
was effective as of July 26, 1999. These assets and related liabilities were
part of a joint product development, marketing and reinsurance relationship with
General American involving funding agreements and guaranteed investment
contracts. As a result of the Transaction, the Company recorded a charge of $90
million during the second quarter of 1999 primarily due to interest rate related
decreases in the fair value of investment securities recaptured by General
American.
The decision to restructure the Company's institutional business was driven
by the need to improve the Company's statutory capitalization ratios and due to
the interest rate related decline in the fair value of investment securities in
the Company's institutional spread products segment. In addition, management
believes that the restructuring was necessary in order to position the Company
for sale. Statutory capitalization ratios reflect the Company's surplus, or
assets held in excess of customer deposits and other liabilities, as a
percentage of the Company's assets. The declining fair values were, and continue
to be, substantially affected by the effect of credit spread widening on market
interest rates and bond market illiquidity, following a period of rapid growth
in institutional deposits.
The Company was subject to a covenant in its bank credit agreement (a
restriction on transferring more than 15% of the Company's assets) that required
the Company to pay off, renegotiate or obtain a waiver with respect to its $38
million long-term debt prior to completing the Transaction. On August 3, 1999,
the Company secured new debt financing of $38 million from General American,
paid in full its outstanding long-term bank debt, and terminated its revolving
line of credit associated with the bank credit agreement.
Under terms of the new debt financing, the debt will mature on the later of
90 days, or if an agreement to sell the Company is executed within the 90 day
period, upon the closing date of the sale. At maturity the unpaid principal and
all accrued interest is payable, unless the parties agree to extend the date.
A copy of the press release of the Company, dated August 3, 1999, relating
to the Transaction is attached hereto as Exhibit 99.1 and is incorporated herein
by reference.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(b) PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma condensed consolidated balance sheet as
of March 31, 1999 gives effect to the Transaction as if it had occurred as of
such date. Pro forma adjustments to reflect the Transaction have been applied to
the March 31, 1999 historical condensed
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consolidated balance sheet of the Company. The unaudited pro forma condensed
consolidated statements of operations for the year ended December 31, 1998
and the three months ended March 31, 1999 present operating results for the
Company as if the Transaction had occurred as of January 1, 1998. Pro forma
adjustments to reflect the Transaction have been applied to the historical
condensed consolidated statements of operations of the Company. The pro forma
adjustments are based upon available information and certain assumptions that
management of the Company believes are reasonable in the circumstances. The
pro forma condensed consolidated financial information should be read in
conjunction with the consolidated financial statements and footnotes thereto
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998. The pro forma condensed consolidated financial information
is not necessarily indicative of the consolidated financial position or
results of operations of the Company that would have been reported if the
Transaction had occurred at the dates indicated, or of the consolidated
results of financial position or future operations.
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ARM Financial Group, Inc.
Pro Forma Condensed Consolidated Balance Sheet
As of March 31, 1999
As Pro Forma Pro Forma
(IN THOUSANDS) Reported Adjustments Company
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ASSETS
Cash and investments:
Fixed maturities, available-for-sale,
at fair value $ 6,175,587 $ (3,195,370) 1a $ 2,980,217
Equity securities, at fair value 33,020 33,020
Mortgage loans on real estate 13,649 13,649
Policy loans 130,848 130,848
Cash and cash equivalents 279,941 (17,650) 1a 262,291
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Total cash and investments 6,633,045 (3,213,020) 3,420,025
Assets held in separate accounts:
Guaranteed 1,248,353 1,248,353
Nonguaranteed 1,735,767 1,735,767
Accrued investment income 65,704 (26,609) 1a 39,095
Deferred policy acquisition costs 137,381 137,381
Value of insurance in force 58,307 58,307
Deferred federal income taxes 141,233 (54,597) 1a 86,636
Goodwill 5,065 5,065
Other assets 17,525 17,525
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Total assets $ 10,042,380 $ (3,294,226) $ 6,748,154
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ARM Financial Group, Inc.
Pro Forma Condensed Consolidated Balance Sheet (continued)
As of March 31, 1999
As Pro Forma Pro Forma
(IN THOUSANDS) Reported Adjustments Company
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LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Customer deposits $ 6,751,175 $ (3,317,080) 1a $ 3,434,095
Customer deposits in separate accounts:
Guaranteed 1,242,845 1,242,845
Nonguaranteed 1,735,767 1,735,767
Long-term debt 38,000 - 1d 38,000
Accounts payable and accrued expenses 20,095 20,095
Payable for investment securities purchased 43,866 11,459 1a 55,325
Payable to reinsurer 6,468 6,468
Other liabilities 25,563 25,563
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Total liabilities 9,863,779 (3,305,621) 6,558,158
Shareholders' equity:
Preferred stock 75,000 75,000
Common stock 238 238
Additional paid-in capital 219,743 219,743
Retained earnings (deficit) 66,660 (90,000) 1a (23,340)
Accumulated other comprehensive income
from net unrealized losses on
available-for-sale securities (183,040) 101,395 1a (81,645)
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Total shareholders' equity 178,601 11,395 189,996
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Total liabilities and shareholders' equity $ 10,042,380 $ (3,294,226) $ 6,748,154
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SEE ACCOMPANYING NOTES
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ARM Financial Group, Inc.
Pro Forma Condensed Consolidated Statements of Operations
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Year Ended December 31, 1998
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As Pro Forma Pro Forma
Reported Adjustments Company
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Investment income $ 480,423 $ (175,016) 1b $ 305,407
Interest credited on customer deposits (380,738) 151,951 1b (228,787)
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Net investment spread 99,685 (23,065) 76,620
Fee income 21,581 (625) 1b 20,956
Other income and expenses:
Surrender charges 5,698 5,698
Operating expenses (35,122) 1,304 lc (33,818)
Commissions, net of deferrals (1,658) (1,658)
Interest expense on debt (2,587) (280) 1d (2,867)
Amortization:
Deferred policy acquisition costs (12,593) (12,593)
Value of insurance in force (5,965) (5,965)
Acquisition-related
deferred charges and goodwill (780) (780)
Non-recurring charges (4,675) (4,675)
Other, net (2,830) (2,830)
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Total other income and expenses (60,512) 1,024 (59,488)
Realized investment losses (1,874) (1,874)
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Income before income taxes 58,880 (22,666) 36,214
Income tax expense (15,066) 7,933 2 (7,133)
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Net income 43,814 (14,733) 29,081
Dividends on preferred stock (6,422) (6,422)
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Net income applicable to
common shareholders $ 37,392 $ (14,733) $ 22,659
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Net income per common share (basic) $ 1.59 $ 0.97
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Net income per common and
common equivalent share (diluted) $ 1.53 $ 0.93
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Cash dividends paid per common
share $ 0.14 $ 0.14
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Shares outstanding (basic) 23,462 23,462
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Shares outstanding (diluted) 24,362 24,362
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(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Three Months Ended March 31, 1999
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As Pro Forma Pro Forma
Reported Company Adjustments
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Investment income $ 136,468 $ (52,962) 1b $ 83,506
Interest credited on customer deposits (107,089) 44,353 1b (62,736)
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Net investment spread 29,379 (8,609) 20,770
Fee income 6,652 (295) 1b 6,357
Other income and expenses:
Surrender charges 1,360 1,360
Operating expenses (10,544) 413 1c (10,131)
Commissions, net of deferrals (418) (418)
Interest expense on debt (712) 52 1d (660)
Amortization:
Deferred policy acquisition costs (4,364) (4,364)
Value of insurance in force (1,413) (1,413)
Acquisition-related deferred
charges and goodwill (152) (152)
Non-recurring charges - -
Other, net (1,489) (1,489)
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Total other income and expenses (17,732) 465 (17,267)
Realized investment losses (351) (351)
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Income before income taxes 17,948 (8,439) 9,509
Income tax expense (4,543) 2,954 2 (1,589)
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Net income 13,405 (5,485) 7,920
Dividends on preferred stock (1,045) (1,045)
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Net income applicable to
common shareholders $ 12,360 $ (5,485) $ 6,875
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Net income per common share (basic) $ 0.52 $ 0.29
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Net income per common and
common equivalent share (diluted) $ 0.51 $ 0.28
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Cash dividends paid per common
share $ 0.04 $ 0.04
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Shares outstanding (basic) 23,813 23,813
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Shares outstanding (diluted) 24,343 24,343
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SEE ACCOMPANYING NOTES.
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NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
In connection with the Transaction, the following pro forma adjustments are
being made to the historical condensed consolidated balance sheets and condensed
consolidated statements of operations of the Company. The objective of these
adjustments is to illustrate the possible scope of the change in the Company's
historical consolidated financial position and results of operations as a result
of the Transaction. The pro forma condensed consolidated balance sheet assumes
the Transaction occurred as of March 31, 1999. The pro forma condensed
consolidated statements of operations assume the Transaction occurred as of
January 1, 1998.
The pro forma condensed consolidated financial statements do not purport
to be indicative of the financial position or operating results which would have
been achieved had the Transaction been consummated as of the dates indicated and
should not be construed as a representation of future financial position or
operating results.
The following describes the pro forma adjustments reflected in the
accompanying pro forma condensed consolidated financial statements.
1. STRUCTURE OF THE TRANSACTION
a. To consummate the Transaction, the Company transferred the following
to General American:
(i) a trust account which is comprised of all assets supporting the
customer deposits previously ceded to Integrity through the
General American reinsurance agreement;
(ii) all related customer deposits previously ceded to Integrity by
General American which were supported by the trust account; and
(iii) net cash of $17,650,000.
Pro forma adjustments reflect the transfer of the aforementioned
assets and liabilities.
As a result of the Transaction, the Company will record a
non-recurring charge of $90 million during the second quarter of 1999
primarily due to interest rate related decreases in the fair value of
investment securities recaptured by General American. No adjustment was
made to the accompanying pro forma condensed consolidated statements of
operations for the non-recurring charge.
At March 31, 1999, the historical condensed consolidated balance sheet
included unrealized investment losses of approximately $156 million
related to the trust account ($101 million after deferred taxes of $55
million). The unrealized losses were recorded in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." A pro forma
adjustment was reported to reverse the effects of SFAS No. 115 and
record the $90 million charge.
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b. Net investment spread was decreased to eliminate amounts earned and
accrued on the assets and liabilities recaptured by General American.
Additionally, fee income earned through an off-balance sheet marketing
partnership arrangement with General American was also eliminated.
c. Operating expenses was reduced for investment management fees paid to
outside parties related to the management of assets recaptured by General
American. It is expected that other operating costs and expenses of the
Company will be less than those reflected in the accompanying pro forma
statements of operations. The estimated expense reductions are primarily
related to the elimination of certain personnel and administrative costs.
For purposes of the pro forma condensed consolidated statements of
operations, these expense reductions have not been included.
d. As a part of the Transaction, the long-term bank debt was paid in full
and replaced with new debt financing with a maturity of 90 days. Interest
expense on a pro forma basis reflects the interest rate on the new debt
financing of one month LIBOR plus 200 basis points.
For pro forma purposes, it is assumed that the new debt financing was
renegotiated after 90 days to extend through the pro forma periods
presented.
2. IMPACT OF FEDERAL INCOME TAXES
Income tax effects resulting from the pro forma adjustments have been
reflected at a rate of 35%.
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(C) EXHIBITS
The following exhibits are filed as part of this report on Form 8-K:
EXHIBIT
NUMBER DESCRIPTION
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99.1 Press release by the Company dated August 3, 1999.
FORWARD-LOOKING STATEMENTS
This document may include Forward-Looking Statements (as defined in the Private
Securities Litigation Reform Act of 1995) regarding the Company's growth and
earnings prospects. The accuracy of these statements is subject to a number of
business factors beyond our control, as periodically described in our SEC
filings. For further information, investors are referred to the section entitled
Forward-Looking Statements of the Company's most recent Form 10-K, which
statements, to the extent applicable, are incorporated into this press release.
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized, on August 18, 1999.
ARM FINANCIAL GROUP, INC.
(Registrant)
By: /s/ EDWARD L. ZEMAN
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Edward L. Zeman
Executive Vice President
and Chief Financial Officer
By: /s/ BARRY G. WARD
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Barry G. Ward
Controller
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