<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q/A
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1996
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Commission file number 1-11422
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PennCorp Financial Group, Inc.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 13-3543540
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
745 Fifth Avenue, New York, New York 10151
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (212) 832-0700
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Former Name, Former Address and Former Fiscal Year, If Changes Since Last Report
Indicate by check x 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 Yes x No
--- ---
Indicate the number of shares outstanding of each of the issuer's
common stock, as of the latest practicable date.
Class November 13, 1996
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Common Stock, $.01 Par Value 28,440,969
<PAGE> 2
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
No.
<S> <C> <C> <C>
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Condensed Balance Sheets -
September 30, 1996 and December 31, 1995................................................... 3
Consolidated Statements of Income -
Three Months and Nine Months Ended
September 30, 1996 and 1995................................................................ 4
Consolidated Condensed Statements of Cash Flows -
Nine Months Ended September 30, 1996 and 1995.............................................. 5
Notes to Unaudited Consolidated Condensed Financial Statements...................................... 6
Review by Independent Certified Public Accountants................................................. 10
Independent Auditors' Report....................................................................... 11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............................................. 12
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings.................................................................................. 14
Item 4. Submission of Matters to a Vote of Security-Holders..................................................14
Item 6. Exhibits and Reports on Form 8-K................................................................... 16
SIGNATURE ...........................................................................................
INDEX TO EXHIBITS ........................................................................................... 17
</TABLE>
<PAGE> 3
PART I. -- FINANCIAL INFORMATION
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
------------- ------------
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
Unaudited
<S> <C> <C>
ASSETS:
Investments:
Fixed maturities:
Held for investment, at amortized cost (market $93,813 and $51,354) $ 92,850 $ 51,366
Available for sale, at market (cost $2,828,239 and $1,649,533) 2,848,179 1,486,985
Equity securities available for sale, at market (cost $14,765 and $14,202) 17,047 15,172
Trading securities, at market 29,506 86,104
Mortgage loans on real estate 246,127 36,563
Policy loans 145,638 125,179
Short term investments 232,107 416,953
Other investments 61,465 43,937
------------ ------------
Total investments 3,672,919 2,262,259
Cash 13,323 27,778
Accrued investment income 43,831 30,992
Accounts and notes receivable 46,014 34,842
Investment in unconsolidated affiliates 118,022 119,390
Present value of insurance in force 362,800 288,664
Deferred policy acquisition costs 248,109 193,903
Costs in excess of net assets acquired 139,397 121,795
Other assets 125,999 70,383
------------ ------------
Total assets $ 4,770,414 $ 3,150,006
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Policy liabilities $ 3,605,051 $ 2,229,047
Notes payable 184,855 307,271
Income taxes, primarily deferred 30,404 24,977
Other liabilities 121,618 92,198
------------ ------------
Total liabilities 3,941,928 2,653,493
------------ ------------
Mandatory redeemable preferred stock:
Series B, $.01 par value, $100 redemption value; authorized, issued and outstanding
127,500 shares at September 30, 1996 and December 31, 1995, respectively 14,330 13,307
shares at September 30, 1996 and December 31, 1995, respectively
Series C, $.01 par value, $100 redemption value; authorized, issued and outstanding
178,500 shares at September 30, 1996 and December 31, 1995, respectively 17,981 16,700
Shareholders' Equity:
Convertible preferred stock, $.01 par value, $50 redemption value; authorized, issued
and outstanding 2,300,000 shares at September 30, 1996 and December 31, 1995,
respectively 110,513 110,513
Series II Convertible preferred stock, $.01 par value, $50 redemption value; authorized
issued and outstanding 2,875,000 shares at September 30, 1996 139,157 --
Common stock, $.01 par value; authorized 50,000,000 shares; issued and outstanding
28,610,906 shares at September 30, 1996 and 22,879,708 at December 31, 1995 286 229
Treasury stock (3,370) (3,370)
Other shareholders' equity 549,589 359,134
------------ ------------
Total shareholders' equity 796,175 466,506
------------ ------------
Total liabilities and shareholders' equity $ 4,770,414 $ 3,150,006
============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
3
<PAGE> 4
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
(UNAUDITED)
<TABLE>
<CAPTION>
------------------------- -------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1996 1995 1996 1995
--------- -------- --------- --------
<S> <C> <C> <C> <C>
REVENUES:
Premiums, principally accident and sickness $ 62,237 $ 58,309 $ 189,417 $176,372
Interest sensitive product policy charges 22,408 18,264 67,752 39,832
Net investment income 60,878 34,630 145,293 65,822
Other income 6,191 8,119 15,426 15,099
Net gains (losses) from sale of investments (3,344) 790 84 411
--------- -------- --------- --------
Total revenues 148,370 120,112 417,972 297,536
--------- -------- --------- --------
BENEFITS AND EXPENSES:
Claims incurred 47,443 38,903 137,124 100,649
Change in liability for future policy benefits and other
policy benefits 24,719 8,667 46,460 11,313
Amortization of present value of insurance in force and
deferred policy acquisition costs 13,754 11,145 42,018 30,613
Amortization of costs in excess of net assets acquired 2,109 1,724 5,789 4,599
Underwriting and other administrative expenses 22,125 23,046 69,994 62,831
Interest and related debt costs 4,781 4,488 15,159 14,494
--------- -------- --------- --------
Total benefits and expenses 114,931 87,973 316,544 224,499
--------- -------- --------- --------
Income before income taxes and extraordinary charge 33,439 32,139 101,428 73,037
Income taxes 10,875 11,441 32,793 25,351
--------- -------- --------- --------
Income before extraordinary charge 22,564 20,698 68,635 47,686
Extraordinary charge, net of tax benefit (322) -- (1,138) --
--------- -------- --------- --------
Net income 22,242 20,698 67,497 47,686
Preferred stock dividend requirements 4,236 1,958 9,636 3,683
--------- -------- --------- --------
Net income available to common shareholders' $ 18,006 $ 18,740 $ 57,861 $ 44,003
========= ======== ========= ========
Net income per share:
Primary:
Income before extraordinary charge $ 0.62 $ 0.79 $ 2.10 $ 1.94
Extraordinary charge $ (0.01) $ -- $ (0.04) $ --
========= ======== ========= ========
Net income $ 0.61 $ 0.79 $ 2.06 $ 1.94
========= ======== ========= ========
Fully diluted:
Income before extraordinary charge $ 0.59 $ 0.73 $ 1.95 $ 1.87
Extraordinary charge $ (0.01) $ -- $ (0.03) $ --
========= ======== ========= ========
Net income $ 0.58 $ 0.73 $ 1.92 $ 1.87
========= ======== ========= ========
Common shares used in computing primary earnings per share 29,497 23,797 28,038 22,693
========= ======== ========= ========
Common shares used in computing fully diluted earnings per 37,102 27,682 33,993 24,249
share ========= ======== ========= ========
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
4
<PAGE> 5
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
----------------------------------
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------------
1996 1995
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<S> <C> <C>
Net cash flows from operating activities $ 91,812 $ 19,221
-------------- -----------
Cash flows from investing activities:
Cash expended in acquisition of business, net of cash (overdraft) acquired
of ($14,901) and $277 (124,957) (16,860)
Purchases of invested assets (771,569) (115,026)
Sales of invested assets 503,633 127,393
Maturities of invested assets 59,678 25,929
Other, primarily short term investments, net 240,197 (96,995)
-------------- -----------
Net cash used by investing activities (93,018) (75,559)
-------------- -----------
Cash flows from financing activities:
Issuance of common stock 156,078 51,381
Additional borrowings 188,999 23,500
Reduction in notes payable (300,354) (91,214)
Dividends on stock (10,030) (1,464)
Redemption of preferred stock -- (34,954)
Issuance of preferred stock 139,157 110,513
Receipts from interest sensitive policies credited to policyholder account balances 104,380 46,227
Return of policyholder account balances on interest sensitive products (239,119) (44,485)
Decrease in repurchase agreement (52,839) --
Other, net 479 (647)
-------------- -----------
Net cash (used) provided by financing activities (13,249) 58,857
-------------- -----------
Increase (decrease) in cash (14,455) 2,519
Cash at beginning of period 27,778 13,037
-------------- -----------
Cash at end of period $ 13,323 $ 15,556
============== ===========
Supplemental disclosures:
Income taxes paid $ 3,967 $ 5,868
============== ===========
Interest paid $ 11,153 $ 11,964
============== ===========
Non-cash financing activities:
Debt assumed with acquisition $ -- $ 38,214
============== ===========
Securities issued or exchanged in conjunction with acquisition $ 14,999 28,750
============== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
5
<PAGE> 6
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) Business and Organization
PennCorp Financial Group, Inc. (the "Company") is an insurance holding
company. The Company commenced operations with the acquisition of Pennsylvania
Life Insurance Company ("PLIC") Executive Fund Life Insurance ("EFLIC")
(PLIC and EFLIC collectively referred to herein as "Penn Life" (effective July
1, 1996, EFLIC was merged into PLIC) and Pacific Life and Accident Insurance
Company ("PLAIC") on August 23, 1990. Through its wholly-owned life insurance
subsidiaries, Penn Life, Peninsular Life Insurance Company ("Peninsular"),
Professional Insurance Corporation ("Professional"), United Companies Life
Insurance Company ("UC Life"), Pioneer Security Life Insurance Company
("Pioneer Security") and its wholly-owned subsidiaries American-Amicable Life
Insurance Company of Texas and Pioneer American Insurance Company (Pioneer
Security and its subsidiaries collectively referred to herein as "AATX"), Salem
Life Insurance Corporation ("SLIC") and its wholly-owned subsidiaries Integon
Life Insurance Corporation ("ILIC"), Georgia International Life Insurance
Company and Occidental Life Insurance Company of North Carolina ("OLIC"), (SLIC
and its wholly-owned subsidiaries collectively referred to herein as "Integon
Life") and PLAIC, the Company is a low cost provider of life insurance and
fixed benefit accident and sickness insurance products throughout the United
States and Canada. The Company's products are sold through several distribution
channels, including exclusive agents, general agents and payroll deduction
programs, and are targeted primarily to middle income individuals in rural and
suburban areas. These products are primarily small premium accident and
sickness insurance policies with defined fixed benefit amounts and traditional
whole life and universal life insurance with low face amounts, each of which
demonstrates stable risk characteristics. With the acquisition of UC Life (as
defined in Note 4), the Company added a portfolio of annuity products which are
actively marketed through independent general agents and financial
institutions.
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated. All dollar amounts presented
hereafter, except per share information, are stated in thousands.
(B) Basis of Presentation
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates
and assumptions that affect the reported amounts of assets and liabilities and
the reported amounts of revenues and expenses during the reporting period.
Accounts that the Company deems to be acutely sensitive to changes in estimates
include deferred policy acquisition costs, future policy benefits, policy and
contract claims and present value of insurance in force. In addition, the
Company must determine requirements for disclosure of contingent assets and
liabilities as of the date of the financial statements based upon estimates. In
all instances, actual results could differ from these estimates.
In the opinion of management, the accompanying unaudited consolidated
condensed financial statements contain all adjustments, none of which are other
than normal recurring accruals, necessary to present fairly the financial
position as of September 30, 1996, and the results of operations and cash flows
for the nine-month periods ended September 30, 1996, and 1995. Results of
operations for interim periods are not necessarily indicative of results for
the entire year.
(2) COMMON STOCK
On March 5, 1996, the Company consummated the sale of 5,131,300 shares of
common stock in a public offering ("the March Offering"). Net proceeds from the
offering were $155,759 and the effect on the Company's financial position was
to increase common stock by $51 and additional paid in capital by $155,708.
As part of the consideration paid to UC Life's former parent company
(United Companies Financial Corporation "UC Financial") the Company issued a
convertible note in the principal amount of $14,999 which was immediately
converted by UC Financial into 483,839 shares of common stock ("UC Financial
shares"). The conversion ratio for the note was established based upon a prior
30 day average closing share price for the Company's common stock. In
connection with the transaction, the Company has agreed to file with the
Securities and Exchange Commission a Shelf Registration Statement by November
21, 1996.
6
<PAGE> 7
(3) CONVERTIBLE PREFERRED STOCK
On August 7, 1996, the Company consummated the sale of 2,875,000 shares
of its $3.50 Series II Convertible Preferred Stock (the "$3.50 Series II
offering"). Gross proceeds of the $3.50 Series II offering were 143,750 which
were offset by $3,968 of discounts and commissions and $625 of expenses
resulting in net proceeds from the offering of approximately $139,157. Each
share of $3.50 Series II Convertible Preferred Stock has a liquidation
preference of $50.00 and is convertible at the option of the holder after
November 5, 1996 into 1.4327 shares of common stock. Net proceeds from the
$3.50 Series II offering were used to repay funds borrowed under the Company's
revolving credit facility to complete the UC Life Acquisition (as defined in
Note 4 below).
The $3.50 Series II Convertible Preferred Stock and the underlying common
stock have not been registered under the Securities Act of 1933, as amended
(the "Securities Act"), or any state securities laws and, unless so registered,
may not be offered or sold within the United States or to, or for the account
or benefit of, U.S. persons (as such terms are defined under the Securities
Act) except pursuant to an exemption from, or in a transaction not subject to,
the registration requirements of the Securities Act and applicable state
securities laws. Accordingly, the $3.50 Series II Convertible Preferred Stock
and the underlying common stock were offered and sold only (a) to "qualified
institutional buyers" (as defined in Rule 144A under the Securities Act) in
reliance on Rule 144A, (b) to a limited number of other "accredited investors"
as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act that are
institutional investors and that, prior to their purchase of the convertible
preferred stock, delivered to the initial purchasers a letter containing
certain representations and agreements and (c) outside the United States to
non-U.S. persons in offshore transactions in reliance on Regulation S under the
Securities Act. The initial purchasers for this offering were Smith Barney Inc.,
Donaldson, Lufkin & Jenrette Securities Corporation and Merrill Lynch & Co.
(4) UC LIFE ACQUISITION
In January 1996, Knightsbridge Capital Fund I L.L.P. (the "Knightsbridge
Fund"), a private investment fund organized by David J. Stone and Steven W.
Fickes, the Company's two most senior executive officers, formed an entity
which entered into an agreement to purchase UC Life from UC Financial. In
connection with the Knightsbridge Fund transactions, which are described in
Note 6, the Company paid $6.3 million to the Knightsbridge Fund for the right
to acquire UC Life, which was the only right of the Knightsbridge Fund with
respect to UC Life. Neither Mr. Stone nor Mr. Fickes nor their respective
affiliates received any portion of that payment.
On July 24, 1996, the Company acquired UC Life from UC Financial, (the "UC
Life Acquisition"), for $110,056 (including expenses of $9,706), consisting of
$100,350 in cash paid by the Company. A cash contribution of $57,258 to UC
Life was made immediately following the UC Life Acquisition and represented
the market value of the real estate and other assets distributed by UC Life to
UC Financial immediately prior to the consummation of the UC Life Acquisition.
The UC Life Acquisition has been accounted for as a purchase transaction
in accordance with generally accepted accounting principles and accordingly
assets and liabilities acquired have been recorded at fair value as of the
acquisition date which became the new cost basis.
The following unaudited pro forma data represents the Company's
consolidated results of operations as if the UC Life Acquisition and its
related financial transactions had occurred on January 1, 1995. The pro forma
results have been prepared for comparative purposes only and do not purport to
be indicative of what would have occurred had the UC Life Acquisition been made
as of January 1, 1995 or the results which may occur in the future.
<TABLE>
<CAPTION>
--------------------------- -----------------------------
Three-month period ended Nine-month period ended
September 30 September 30
--------------------------- -----------------------------
1996 1995 1996 1995
------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues $155,615 $155,060 $495,125 $404,712
Income before income taxes and extraordinary charge 31,523 35,281 108,088 84,857
Net income before extraordinary charge 22,024 25,178 73,825 58,792
Net income per share before extraordinary charge 0.58 0.85 2.07 2.06
</TABLE>
7
<PAGE> 8
(5) EXTRAORDINARY CHARGE
The Company utilized $137,000 of proceeds from the March offering to
retire certain indebtedness of the Company and its subsidiaries. As a result of
the early retirement of such indebtedness and the resulting write-off of
deferred financing costs, the company realized an after-tax extraordinary
charge of $816 for the nine-month period ended September 30, 1996. If the
retirement of debt and issuance of common stock had occurred at the beginning
of the period, primary earnings per share would have decreased $0.03, and fully
diluted earnings per share would have decreased $0.02.
As part of the Company's ongoing evaluation of its capital structure, the
Company utilized proceeds available to it under its revolving credit facility
to repurchase approximately $10,354 of its 9 1/4% Senior Subordinated Notes due
2003 ("Notes"). The Company realized an extraordinary charge of $322 for the
three-month and nine-month periods ended September 30, 1996, as a result of the
write-off of certain deferred financing, swap cancellation and other costs
related to the Notes repurchased.
(6) KNIGHTSBRIDGE
In early 1995, with the authorization of the Company's Board of Directors,
David J. Stone, Chairman of the Board and CEO and Steven W. Fickes, President
and CFO of the Company, organized Knightsbridge Capital Fund I, L.P. ("the
Knightsbridge Fund") to raise capital to make equity and equity-linked
investments in companies engaged primarily in the life insurance industry.
Following its creation, the Knightsbridge Fund received subscriptions for
$92,000 in limited partnership interests, including a $15,000 subscription by
the Company. The limited partners of the Knightsbridge Fund also include
affiliates of 10 leading domestic and international banking organizations.
In early 1996, Messrs. Stone and Fickes began discussions with the Board
of Directors of the Company on a means of consolidating their outside business
interests, including the Knightsbridge Fund, under the Company. Subsequently,
Messrs. Stone and Fickes and the members of the Knightsbridge Committee (a
committee of the Board composed of the Company's non-employee Directors formed
to evaluate all transactions submitted to the Company by the Knightsbridge
Fund) and Compensation Committee of the Board of Directors developed a plan to
enable the Company to manage the Knightsbridge Fund and to provide Messrs.
Stone and Fickes with a compensation program that offers them compensation
opportunities with economic interests aligned with shareholders generally and
that provides incentives for each to make a long-term commitment to the
Company.
The Company has agreed to acquire Messrs. Stone's and Fickes' interests in
the Knightsbridge Fund and its manager, Knightsbridge Management, L.L.C., for
$10,000 (in the form of a five year note of the Company that is mandatorily
convertible at maturity into 338,983 shares of the Company's common stock).
That transaction requires, among other things, receipt of a fairness opinion
from Smith Barney Inc. and stockholder approval.
In addition, in light of the proposed restructuring of the Company's
relationship with the Knightsbridge Fund, and as a result of the absence of the
timing pressures and structural constraints imposed by I.C.H. Corporation
(collectively, with certain of its subsidiaries, "ICH") in connection with the
acquisition of Southwestern Life Insurance Company ("SWLIC") and Union Bankers
Insurance Company ("UBIC") from ICH in December 1995 and the improvement in the
Company's leverage ratio as a result of the March Offering, the Company intends
to enter into negotiations to acquire the outstanding minority interests in
Southwestern Financial Corporation, the entity formed by the Company and the
Knightsbridge Fund to acquire Southwestern Life Insurance Company and Union
Bankers Insurance Company. There can be no assurance, however, that such
negotiations will be successful and, if successful, what the price, terms and
conditions of such acquisition will be.
8
<PAGE> 9
(7) SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
Through its direct investment in Southwestern Financial Corporation and
Subsidiaries, the Company beneficially owns 74.8% of the economic interest
in Southwestern Financial Corporation and Subsidiaries.
Financial information for the nine-month period ended September 30, 1996
is provided below (unaudited).
<TABLE>
<CAPTION>
CONSOLIDATED CONDENSED BALANCE SHEET
SEPTEMBER 30, 1996
------------------
<S> <C>
ASSETS:
Invested assets $ 1,660,739
Insurance assets 501,467
Other assets 99,747
------------------
Total assets $ 2,261,953
==================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Policy liabilities $ 1,751,309
Notes payable 159,813
Other liabilities 199,321
Mandatory redeemable preferred stock 33,167
Shareholders' equity 118,343
------------------
Total liabilities and shareholders' equity $ 2,261,953
==================
CONSOLIDATED CONDENSED STATEMENT OF INCOME
NINE MONTHS ENDED
SEPTEMBER 30, 1996
------------------
REVENUES:
Policy revenues $ 161,106
Net investment income 97,068
Net gains from sale of investments 2,908
Other income 12,886
------------------
Total revenues 273,968
------------------
BENEFITS AND EXPENSES:
Policyholder benefits 157,428
Amortization 21,572
Underwriting and other operating expenses 53,463
Interest and related debt costs 10,511
------------------
Total benefits and expenses 242,974
------------------
Income before income taxes 30,994
Income taxes 11,726
------------------
Net income 19,268
Preferred stock dividend requirements (2,043)
------------------
Net income available to common shareholders $ 17,225
==================
</TABLE>
9
<PAGE> 10
REVIEW BY INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The September 30, 1996 and 1995 financial statements included in this
filing have been reviewed by KPMG Peat Marwick L.L.P., independent certified
public accountants, in accordance with established professional standards and
procedures for such a review.
The report of KPMG Peat Marwick L.L.P. commenting upon their review is included
on page 11.
[REST OF PAGE INTENTIONALLY LEFT BLANK]
10
<PAGE> 11
[KPMG PEAT MARWICK LLP LETTERHEAD]
Independent Auditors' Review Report
The Board of Directors and Shareholders
PennCorp Financial Group, Inc.
We have reviewed the accompanying consolidated condensed balance sheet of
PennCorp Financial Group, Inc. and subsidiaries as of September 30, 1996, the
consolidated statements of income for the three and nine-month periods ended
September 30, 1996 and 1995, and the consolidated condensed statements of cash
flows for the nine-month periods ended September 30, 1996 and 1995. These
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of PennCorp Financial Group, Inc. as
of December 31, 1995 and the related consolidated statements of income,
shareholders' equity, and cash flows for the year then ended (not presented
herein); and in our report dated February 5, 1996, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
financial information set forth in the accompanying consolidated condensed
balance sheet as of December 31, 1995 is fairly presented, in all material
respects, in relation to the consolidated balance sheet from which it has been
derived.
KPMG PEAT MARWICK LLP
November 13, 1996
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This "Management's Discussion and Analysis of Financial Condition and
Results of Operations" should be read in conjunction with the comparable
discussion filed with the Company's annual filing with the Securities and
Exchange Commission on Form 10-K for the fiscal year ended December 31, 1995
and the Company's 1995 Annual Report to Shareholders.
The following discussion should be read in conjunction with the unaudited
consolidated condensed financial statements and related notes of this Quarterly
Report on Form 10-Q/A.
Cautionary Statement for purposes of the Safe Harbor Provisions of the
Private Securities Litigation Reform Act of 1995. The statements below that
relate to future plans, events or performances are forward-looking statements
that involve a number of risks or uncertainties. Among those items that could
adversely affect the Company's financial condition, results of operations and
cash flows are the following: changes in regulations affecting insurance
companies, interest rates, the federal income tax code (to the extent the
Company's product mix includes tax deferred accumulation products), the ratings
assigned to the Company's insurance subsidiaries by independent rating
organizations such as A.M. Best (which the Company believes are particularly
important to the sale of annuity and other accumulation products) and
unanticipated litigation. There can be no assurance that other factors not
currently anticipated by management will not also materially and adversely
affect the Company's results of operations.
GENERAL
Acquisitions. The Company has continued to broaden its distribution
channels and realize cost savings, product and agent cross-pollinization
opportunities through strategic acquisitions. On July 24, 1996, the Company
acquired UC Life whose principle products are deferred annuities sold through
independent general agents and financial institutions. The comparability of the
Company's financial condition, results of operations and cash flows for each of
the periods have been affected by the UC Life Acquisition.
Strategic Review of Business Units. As a result of the tremendous growth
the Company has experienced, the diversification of the underlying business
units resulting from acquisitions over time and the need for the Company to be
able to rapidly integrate future acquisitions, the Company is in the process of
evaluating each of its business units. This evaluation includes the units
current and long-term profitability potential, the ability of the unit to
absorb the operations related to future acquisitions and the market focus of
the business unit. The Company expects to complete its evaluation late in the
fourth quarter and depending upon the results will consider a full array of
actions which may include realignment of management responsibilities, corporate
structure and the redeployment of capital or assets. The Company is not yet
able to predict the impact of such review of the Company's results of
operation, cash flows and financial condition.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
During the nine-months ended September 30, 1996, cash provided by
operations was $91.8 million compared to $19.2 million for the nine-month
period ended September 30, 1995. Integon Life and UC Life provided $93.3
million in 1996 and Integon Life provided $14.6 million in 1995, consisting
primarily of investment income. Excluding Integon Life and UC Life for both
periods, cash flow from operations declined by $4.7 million. This decline is
primarily due to increased direct claim payments of $6.4 million in OLIC and
$1.7 million in Penn Life which was offset by a decline in interest payments
and income tax payments of $2.7 million.
RESULTS OF OPERATIONS
Policy Revenue. Total policy revenue for the nine months ended September
30, 1996 increased 19.0% to $257.2 million from $216.2 million for the
comparable period ended September 30, 1995. Life product revenue increased
$45.9 million while fixed benefit accident and sickness product revenue
declined by $4.8 million to $127.6 million. The significant increase in revenue
from life products was due primarily to the inclusion of $ 41.5 million in
revenue from Integon Life, excluding OLIC and the inclusion of UC Life of $1.0
million of life product revenue in 1996. The decline in policy revenue from
accident and sickness products was primarily attributable to the Company's
decision during 1995 to discontinue new business production of certain
disability income products. In addition, policy revenue from Penn Life and OLIC
closed blocks of business declined approximately $1.0 million for the
nine-month period ended September 30, 1996 when compared to 1995 while policy
revenue from foreign operations (primarily Canada) increased .2% or
approximately $3.6 million. Policy revenue expressed in Canadian dollars
increased 10.1% or $3.9 million (Canadian). The higher growth rate in foreign
operations revenues reported in U.S. dollars resulted from the strengthening of
the Canadian dollar which advanced against the U.S. dollar by approximately .7
percent.
12
<PAGE> 13
For the three-month period ended September 30, 1996, total policy revenue
increased 6.7% to $62.2 million from $58.3 million for the comparable
three-month period ended September 30, 1995. The $3.9 million increase included
$1.0 million of additional life product policy revenue from UC Life. The
remainder of the growth in policy revenue was derived from increased life sales
of approximately $4.3 million offset by a decline in fixed benefit revenue of
$1.4 million.
Net Investment Income. Net investment income for the nine months ended
September 30, 1996 was $145.3 million compared to $65.8 million for the nine
months ended September 30, 1995. Of the $79.5 million increase in investment
income, $78.5 million of the increase was attributable to the addition of UC
Life and Integon Life, excluding OLIC. The remainder of the increase was due to
a slightly larger invested asset base and an improvement in the mix of invested
assets toward higher yielding assets. Investment yield based upon weighted
average amount of invested assets outstanding each period was approximately
7.5% and 7.4% for the nine-month periods ended September 30, 1996 and 1995,
respectively.
Investment income for the three-month period ending September 30, 1996
increased to $60.9 million from $34.6 million for the comparable period in
1995. Substantially all the increase was attributable to UC Life and Integon
Life with weighted average yields, excluding Integon Life and UC Life,
remaining level at 7.3% for both periods.
Other Income. Included in other income for the nine- and three-month
periods, ended September 30, 1996, is income resulting from the Company's 74.8%
equity in the undistributed earnings of Southwestern Financial Corporation of
$12.9 million and $4.5 million, respectively (see Note 7 of Notes to
Consolidated Condensed Financial Statements). For the nine- and three-month
periods ended September 30, 1995 included in other income is the Company's 49%
equity in undistributed earnings of Integon Life, excluding OLIC of $3.8
million and $500,000 , respectively.
In conjunction with the Company's acquisition and investment activities,
management is regularly presented with investment opportunities to invest in
substantially undervalued securities in corporations which will likely
undertake some form of restructuring. In 1995, the Company established a
trading security account for such investments. Included in other income for the
nine- and three-month periods ended September 30, 1996, are gains of $800,000
and $1.0 million resulting from such activities, compared to $7.1 and $4.0
million of gains for the nine- and three-month periods ended September 30,
1995, respectively.
Claims Incurred. Claims incurred for the nine months ended September 30,
1996 increased 36.3% to $137.1 million from $100.6 million for the nine-month
period ended September 30, 1995. The increase in claims incurred is
attributable to $32.8 million of claims from UC Life and Integon Life,
excluding OLIC, and a significant increase in claims for OLIC of $1.4 million.
The Company has recently experienced higher than expected claim costs for OLIC
for which the Company is currently undertaking an extensive evaluation of the
profitability of OLIC and its various lines of business including pre- and
post-purchase blocks. The Company anticipates that a thorough review of OLIC
claim trends will be completed in early 1997.
For the three-month period ended September 30, 1996, claims incurred
increased 21.9% to $47.4 million from $38.9 million for the comparable period
in 1995. Of the $8.5 million increase, $3.1 million is attributable to Penn
Life and $2.0 million is attributed to OLIC. The remainder of the increase is
primarily attributable to claims for UC Life and Integon Life, exclusive of
OLIC, of $1.4 and $1.7 million, respectively.
Underwriting and Other Administrative Expenses. For the nine-month period
ended September 30, 1996, underwriting and other administrative expenses
increased 11.5% to $70.0 million from $62.8 million for the nine months ended
September 30, 1995. The increase is primarily attributable to the inclusion of
$11.7 million of expenses from UC Life and Integon Life, excluding OLIC
combined with expenses incurred with the outsourcing of certain data processing
services. Offsetting the increases were modest improvements in costs associated
with the ongoing maintenance of inforce business.
Underwriting and other administrative expenses decreased by $900,000 to
$22.1 million for the three-month period ended September 30, 1996 when compared
to $23.0 million for the same period of 1995. The decrease was attributable to
overall declines noted above for the nine-month period offset by an increase
of $1.8 million from the inclusion of UC Life.
Interest and Related Debt Costs. For the nine-month period ended September
30, 1996, interest and amortization of deferred debt issuance costs increased
to $15.2 million from $14.5 million for the comparable 1995 period. This
increase was the result of the Company's acquisition of UC Life for which the
company temporarily borrowed $143 million prior to repayment from net proceeds
from the $3.50 Series II offering and the determination by the Company to
balance its cash flow requirements from its insurance subsidiaries with
borrowings under its revolving credit facility which added interest costs of
$1.1 million. Offsetting the increase was a $300,000 decrease in interest costs
relating to the Company's previously outstanding line of credit. The effective
interest rates on the Company's $150 million Notes, for the nine-month periods
ending September 30, 1996 and 1995, were unchanged at 9.5 percent.
13
<PAGE> 14
Income Taxes. The effective tax rate for the nine- and three-month periods
ended September 30, 1996 was approximately 33% compared to 34% for the nine
months ended September 30, 1995 and 34% for the three months ended June 30,
1995. The effective tax rates for the current periods are less than the
effective tax rates for the prior periods because of the inclusion in 1996 of
undistributed earnings of an unconsolidated affiliates that are not subject to
tax in greater portion to total income during 1996 than comparable 1995
periods.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a party to various pending or threatened legal actions
arising in the ordinary course of business some of which include
allegations of insufficient policy illustrations and agent
misrepresentation. Although the outcome of such actions is not presently
determinable, management does not believe that such matters, individually
or in the aggregate, would have a material adverse affect on the Company's
financial position or results of operations if resolved against the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
The Company held its Annual Meeting of Shareholders on July 11, 1996.
1. The election of three Class I Directors to hold office for three years
and until their respective successors are elected and qualified.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
VOTING
- ------------------------------------------------------ ------------------------------ -------------------
NUMBER OF NUMBER OF NUMBER OF BROKER
SHARES FOR SHARES WITHHELD NON-VOTES
- ------------------------------------------------------ ------------------------------ -------------------
<S> <C> <C> <C>
David J. Stone 21,807,789 291,674 0
- ------------------------------------------------------ ------------------------------ -------------------
Steven W. Fickes 21,807,399 292,064 0
- ------------------------------------------------------ ------------------------------ -------------------
Thomas A. Player 22,018,753 80,710 0
- ------------------------------------------------------ ------------------------------ -------------------
</TABLE>
2. The adoption of the Company's 1996 Stock Award and Stock Option Plan.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
VOTING
- -------------------------------- ------------------------------ -------------------------- -------------------
NUMBER OF NUMBER OF NUMBER OF SHARES NUMBER OF BROKER
SHARES FOR SHARES AGAINST ABSTAINED NON-VOTES
- -------------------------------- ------------------------------ -------------------------- -------------------
<S> <C> <C> <C>
13,857,215 5,524,549 28,560 3,021,381
- -------------------------------- ------------------------------ -------------------------- -------------------
</TABLE>
3. The adoption of the Company's 1996 Senior Executive Annual Incentive
Award Plan.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
VOTING
- -------------------------------- ------------------------------ -------------------------- -------------------
NUMBER OF NUMBER OF NUMBER OF SHARES NUMBER OF BROKER
SHARES FOR SHARES AGAINST ABSTAINED NON-VOTES
- -------------------------------- ------------------------------ -------------------------- -------------------
<S> <C> <C> <C>
22,304,414 92,371 34,920 0
- -------------------------------- ------------------------------ -------------------------- -------------------
</TABLE>
MATTERS VOTED UPON AT THE ANNUAL MEETING OF SHAREHOLDERS:
14
<PAGE> 15
4. The grant to Steven W. Fickes of a warrant to purchase 60,000 shares
of the Company's common stock.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
VOTING
- -------------------------------- ------------------------------ -------------------------- -------------------
NUMBER OF NUMBER OF NUMBER OF SHARES NUMBER OF BROKER
SHARES FOR SHARES AGAINST ABSTAINED NON-VOTES
- -------------------------------- ------------------------------ -------------------------- -------------------
<S> <C> <C> <C>
19,219,983 133,623 56,718 3,021,381
- -------------------------------- ------------------------------ -------------------------- -------------------
</TABLE>
5. Ratification of the selection of KPMG Peat Marwick L.L.P. as
independent auditors.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
VOTING
- -------------------------------- ------------------------------ -------------------------- -------------------
NUMBER OF NUMBER OF NUMBER OF SHARES NUMBER OF BROKER
SHARES FOR SHARES AGAINST ABSTAINED NON-VOTES
- -------------------------------- ------------------------------ -------------------------- -------------------
<S> <C> <C> <C>
22,419,861 3,366 8,478 0
- -------------------------------- ------------------------------ -------------------------- -------------------
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Numbers
11.1 Computation of earning per share
15.1 Independent Auditor's Report
27 Financial Data Schedule
(b) Reports on Form 8-K
(i) A report on Form 8-K, dated July 17, 1996, was filed with the
Securities and Exchange Commission ("SEC") by the Company relating to
its acquisition of United Companies Life Insurance Company.
(ii) A report on Form 8-K, dated August 5, 1996, was filed with the SEC by
the Company relating to the pricing of the $3.50 Series II
Convertible Preferred Stock.
(iii) A report on Form 8-K, dated August 8, 1996, was filed with the SEC
by the Company relating to the filing of audited financial statements
and certain unaudited pro forma financial information of United
Companies Life Insurance Company.
15
<PAGE> 16
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PennCorp Financial Group, Inc.
------------------------------
(The Registrant)
Date: November 14, 1996 By: /s/Steven W. Fickes
----------------------------
Steven W. Fickes
President and Chief Financial Officer
(Authorized officer and principal accounting
and financial officer of the Registrant)
16
<PAGE> 17
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Numbers
- -------
<S> <C>
11.1 Computations of earnings per share
15.1 Independent Auditor's Report *
27 Financial Data Schedule
</TABLE>
* Such exhibit is incorporated by reference to page 11 of this
Form 10-Q/A.
17
<PAGE> 1
EXHIBIT 11.1
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
---------------------- ----------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Primary:
Shares outstanding beginning of period 28,093 22,880 22,880 19,130
Issuance of 3,750 shares on March 16, 1995 -- -- -- 2,761
Issuance of 5,131 shares on March 5, 1996 -- -- 3,914 --
Issuance of convertible debentures on July 24, 1996 358 -- 120 --
Issuance of shares under the Company's April 1992
Stock Option Plan 16 -- 53 --
Incremental shares applicable to:
Warrants issued pursuant to August 1990 employment
agreement 495 463 496 445
Options granted pursuant to the Company's Stock
Option Plan 212 314 248 291
Warrants issued pursuant to a Senior Management
Stock Warrant Plan 513 264 517 126
Treasury shares (190) (124) (190) (60)
======= ======= ======= =======
29,497 23,797 28,038 22,693
======= ======= ======= =======
Fully Diluted:
Shares outstanding beginning of period 28,093 22,880 22,880 19,130
Issuance of 3,750 shares on March 16, 1995 -- -- -- 2,761
Issuance of 5,131 shares on March 5, 1996 -- -- 3,914 --
Issuance of convertible debentures on July 24, 1996 358 -- 120 --
Issuance of shares under the Company's April 1992
Stock Option Plan 16 -- 53 --
Incremental shares applicable to:
Warrants issued pursuant to August 1990 employment
agreement 500 475 500 475
Options granted pursuant to the Company's Stock
Option Plan 216 332 254 330
Warrants issued pursuant to a Senior Management
Stock Warrant Plan 550 358 550 345
Treasury shares (190) (124) (190) (60)
Conversion of 2,300 shares of Convertible Preferred Stock at
$22.60 on July 25, 1995 at a rate of 2.2123 shares to 1
preferred share 5,088 3,761 5,088 1,268
Conversion of 2,875 shares of Series II Convertible Preferred
Stock at $34.90 on August 7, 1996 at a rate of 1.4327
shares of common to 1 preferred share 2,471 -- 824 --
------- ------- ------- -------
37,102 27,682 33,993 24,249
======= ======= ======= =======
</TABLE>
18
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<DEBT-HELD-FOR-SALE> 2,849,179
<DEBT-CARRYING-VALUE> 92,850
<DEBT-MARKET-VALUE> 93,813
<EQUITIES> 17,047
<MORTGAGE> 246,127
<REAL-ESTATE> 24,771
<TOTAL-INVEST> 3,672,919
<CASH> 13,323
<RECOVER-REINSURE> 60,526
<DEFERRED-ACQUISITION> 248,109
<TOTAL-ASSETS> 4,770,414
<POLICY-LOSSES> 3,503,494
<UNEARNED-PREMIUMS> 16,200
<POLICY-OTHER> 45,345
<POLICY-HOLDER-FUNDS> 40,012
<NOTES-PAYABLE> 185,622
32,311
249,670
<COMMON> 286
<OTHER-SE> 546,219
<TOTAL-LIABILITY-AND-EQUITY> 4,770,414
189,417
<INVESTMENT-INCOME> 145,293
<INVESTMENT-GAINS> 84
<OTHER-INCOME> 15,426
<BENEFITS> 137,124
<UNDERWRITING-AMORTIZATION> 117,801
<UNDERWRITING-OTHER> 15,159
<INCOME-PRETAX> 101,428
<INCOME-TAX> 32,793
<INCOME-CONTINUING> 68,635
<DISCONTINUED> 0
<EXTRAORDINARY> 1,138
<CHANGES> 0
<NET-INCOME> 67,497
<EPS-PRIMARY> 2.06
<EPS-DILUTED> 1.92
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
