<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 2, 1996.
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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PENNCORP FINANCIAL GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C>
DELAWARE 13-3543540
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)
SCOTT D. SILVERMAN, ESQ.
SENIOR VICE PRESIDENT, GENERAL COUNSEL
745 FIFTH AVENUE, SUITE 500 AND SECRETARY
NEW YORK, NEW YORK 10151 PENNCORP FINANCIAL GROUP, INC.
(212) 832-0700 745 FIFTH AVENUE, SUITE 500
(Address, Including Zip Code, and Telephone NEW YORK, NEW YORK 10151
Number, Including Area Code, of (212) 832-0700
Registrant's Principal Executive Office) (Name, Address, Including Zip Code, and
Telephone Number, Including Area Code,
of Agent For Service)
</TABLE>
Copy to:
JEREMY W. DICKENS, ESQ.
WEIL, GOTSHAL & MANGES LLP
100 CRESCENT COURT
SUITE 1300
DALLAS, TEXAS 75201
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
possible after this Registration Statement becomes effective.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
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CALCULATION OF REGISTRATION FEE
<TABLE>
==========================================================================================================
PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITY TO BE REGISTERED REGISTERED PER SHARE OFFERING PRICE FEE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$3.50 Series II Convertible Preferred
Stock, par value $.01 per share......... 2,875,000 shares $53.63(1) $154,186,250(1) $46,723.11
- ----------------------------------------------------------------------------------------------------------
Common Stock, par value $.01 per share.... 4,118,911 shares(2) -- -- -- (3)
==========================================================================================================
</TABLE>
(1) Calculated in accordance with Rule 457(c) under the Securities Act of 1933,
as amended, based on the average of the bid and asked price of the $3.50
Series II Convertible Preferred Stock of the Registrant on September 30,
1996, as reported to the Registrant by Smith Barney Inc.
(2) Or such greater number of shares of Common Stock resulting from an
adjustment to the conversion price of the $3.50 Series II Convertible
Preferred Stock pursuant to the Certificate of Designation governing the
$3.50 Series II Convertible Preferred Stock.
(3) Pursuant to Rule 457(i) under the Securities Act, no additional filing fee
is required with respect to the shares of Common Stock of the Registrant
issuable upon conversion of the $3.50 Series II Convertible Preferred Stock
of the Registrant.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
***************************************************************************
* *
* INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A *
* REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED *
* WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT *
* BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE *
* REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT *
* CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY *
* NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH *
* SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO *
* REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH *
* STATE. *
* *
***************************************************************************
SUBJECT TO COMPLETION, DATED OCTOBER 2, 1996
PROSPECTUS
PENNCORP FINANCIAL GROUP, INC.
2,875,000 SHARES OF $3.50 SERIES II CONVERTIBLE PREFERRED STOCK
4,118,911 SHARES OF COMMON STOCK
This Prospectus relates to the offer and sale by the Selling
Securityholders (as hereinafter defined) of (i) up to 2,875,000 shares of $3.50
Series II Convertible Preferred Stock, par value $0.01 per share (the
"Convertible Preferred Stock"), of PennCorp Financial Group, Inc., a Delaware
corporation ("PennCorp" or the "Company") and (ii) up to 4,118,911 shares of
common stock, par value $.01 per share, of PennCorp (or such other number of
shares of Common Stock resulting from an adjustment to the conversion price of
the Convertible Preferred Stock pursuant to the antidilution provisions of the
Certificate of Designation (the "Certificate of Designation") governing the
Convertible Preferred Stock) issuable upon conversion of the Convertible
Preferred Stock (the "Common Stock"; the shares of Convertible Preferred Stock
and underlying Common Stock to which this Prospectus relates collectively being
the "Securities"). This Prospectus also relates to the offer and sale by
PennCorp of the Common Stock issuable upon conversion of the Convertible
Preferred Stock. The Company issued and sold all the shares of Convertible
Preferred Stock to Smith Barney Inc., Donaldson, Lufkin & Jenrette Securities
Corporation and Merrill Lynch, Pierce, Fenner & Smith Incorporated
(collectively, the "Initial Purchasers") in August 1996 in a private placement
transaction. The Selling Securityholders acquired the Convertible Preferred
Stock from the Initial Purchasers or in subsequent secondary market
transactions.
Each share of Convertible Preferred Stock has a liquidation preference of
$50.00. The Convertible Preferred Stock is convertible at the option of the
holder at any time after November 5, 1996, unless previously redeemed, into
Common Stock of PennCorp at a conversion price of $34.90 per share of Common
Stock, subject to adjustment in certain events. On October 1, 1996, the last
reported sale price of the Common Stock on the New York Stock Exchange (symbol
"PFG") was $32.375 per share.
The Convertible Preferred Stock is not redeemable prior to August 2, 1999.
Thereafter, the Convertible Preferred Stock is redeemable at the option of the
Company, in whole or in part, at specified redemption prices plus accrued and
unpaid dividends through the redemption date. Dividends on the Convertible
Preferred Stock are cumulative from August 7, 1996 and are payable quarterly in
arrears commencing November 1, 1996. See "Description of the Convertible
Preferred Stock."
The Selling Securityholders may sell the Securities to which this
Prospectus relates in whole or from time to time in part through underwriters or
dealers, through brokers or other agents, or directly to one or more purchasers,
at market prices prevailing at the time of sale or at prices otherwise
negotiated. The Company will receive no proceeds from the sale of the Securities
by the Selling Securityholders. The Company will pay all expenses incident to
the registration of the Securities offered hereby, except for brokers'
commissions, underwriters' discounts or commissions, and the fees and expenses
of any counsel for the Selling Securityholders. The Selling Securityholders and
any broker, dealer or underwriter that participates with the Selling
Securityholders in the distribution of the Securities may be deemed to be an
"underwriter" within the meaning of the Securities Act of 1933, as amended (the
"Securities Act"), and any commissions received by them and any profit on the
resale of such Securities purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. See "Plan of Distribution"
for indemnification arrangements between PennCorp and the Selling
Securityholders.
The Convertible Preferred Stock currently trades in the Private Offerings,
Resales and Trading through Automated Linkages ("PORTAL") Market. Shares of
Convertible Preferred Stock sold pursuant to this Prospectus thereafter will not
be eligible for trading in the PORTAL Market. PennCorp does not intend to list
the Convertible Preferred Stock on any securities exchange or to seek approval
for quotation of the Convertible Preferred Stock through any automated quotation
system. Although the Initial Purchasers have advised PennCorp that they intend
to make a market in the Convertible Preferred Stock, they are not obligated to
do so and may suspend any such market-making activities at any time and without
prior notice. Accordingly, there can be no assurance that an active market for
the Convertible Preferred Stock will develop or be maintained.
SEE "RISK FACTORS" BEGINNING ON PAGE 3 FOR A DISCUSSION OF CERTAIN FACTORS
TO BE CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THE DATE OF THIS PROSPECTUS IS , 1996.
<PAGE> 3
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy and information statements, and other information
with the Securities and Exchange Commission (the "Commission"). Such reports,
proxy and information statements, and other information may be inspected and
copied at the public reference facilities of the Commission at Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional
offices at 500 West Madison Street, Suite 1400, Chicago, Illinois 60611, and 7
World Trade Center, 13th Floor, New York, New York 10048. Copies of such
material can also be obtained at prescribed rates by writing to the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549. The Commission also maintains a Web site (http://www.sec.gov) that
contains reports, proxy and information statements regarding registrants, such
as the Company, that file electronically with the Commission. In addition, the
Company's Common Stock is listed on the New York Stock Exchange, Inc. (the
"NYSE") and such material also is available for inspection at its offices at 20
Broad Street, New York, New York 10005.
The Company has filed a Registration Statement (together with all
amendments and exhibits thereto, the "Registration Statement"), of which this
Prospectus is a part, with the Commission with respect to the Securities offered
hereby. This Prospectus does not contain all of the information set forth in the
Registration Statement, certain parts of which have been omitted in accordance
with the rules and regulations of the Commission. For further information,
reference is made to the Registration Statement. Copies of the Registration
Statement and the exhibits thereto are on file at the offices of the Commission
and may be obtained upon payment of the fee prescribed by the Commission, or may
be examined without charge at the public reference facilities of the Commission
referred to above.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission are incorporated into
this Prospectus by reference:
(1) The Company's Annual Report on Form 10-K for the year ended
December 31, 1995, as amended by the Company's Annual Report on Form 10-K/A
for the year ended December 31, 1995;
(2) The Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1996, as amended by the Company's Quarterly Report on Form 10-Q/A
for the quarter ended March 31, 1996;
(3) The Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996;
(4) The Company's Current Report on Form 8-K dated July 15, 1996;
(5) The Company's Current Report on Form 8-K dated July 24, 1996;
(6) The Company's Current Report on Form 8-K dated August 5, 1996; and
(7) The financial statements of Integon Life Corporation and
Subsidiaries included on pages F-28 to F-58 of the Prospectus, dated
February 28, 1996, relating to the offer and sale of 4,462,000 shares of
Common Stock of the Company and filed with the Commission pursuant to Rule
424(b) under the Securities Act (File No. 333-00092).
All documents filed by the Company pursuant to Section 13(a), 13(c), 14, or
15(d) of the Exchange Act after the date of this Prospectus and prior to the
termination of the offering shall be deemed to be incorporated by reference
herein and to be a part hereof from the date of filing such documents. Any
statement contained in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any other
subsequently filed document that also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
The Company will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus is delivered, upon the
written or oral request of such person, a copy of any of the documents which
have been or may be incorporated herein by reference, except that exhibits to
such documents will not be provided unless they are specifically incorporated by
reference into such documents. Requests for such copies should be directed to
PennCorp Financial, Inc., at 3 Bethesda Metro Center, Suite 1600, Bethesda,
Maryland 20814, Attention: Investor Relations, telephone number (301) 656-1777.
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FOR NORTH CAROLINA INVESTORS: THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE COMMISSIONER OF INSURANCE FOR THE STATE OF NORTH CAROLINA,
NOR HAS THE COMMISSIONER OF INSURANCE RULED UPON THE ACCURACY OR THE ADEQUACY OF
THIS DOCUMENT.
2
<PAGE> 4
THE COMPANY
The Company, through its operating subsidiaries, is a low cost provider of
life insurance, fixed benefit accident and sickness insurance and annuity
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.
The Company's principal executive office is located at 745 Fifth Avenue,
New York, New York 10151, and its telephone number is (212) 832-0700. The
Company's principal insurance and related support operations are headquartered
in Raleigh, North Carolina.
RISK FACTORS
The following factors should be carefully considered, together with the
information in this Prospectus and the documents incorporated by reference
herein, in evaluating an investment in the Securities offered hereby.
RELIANCE ON DIVIDENDS AND OTHER PAYMENTS FROM INSURANCE SUBSIDIARIES
PennCorp is a holding company with no independent business operations.
Consequently, PennCorp's primary sources of cash to meet its debt service and
other obligations and to pay dividends on its capital stock are dividends,
surplus debenture payments and tax sharing payments from its various
subsidiaries. The ability of such subsidiaries to make dividend and other
payments to PennCorp is dependent upon their receipt of sufficient cash payments
from their respective insurance subsidiaries. The ability of the Company's
insurance subsidiaries to pay dividends and make other payments is limited by
the insurance laws of their respective states of domicile. There can be no
assurance that the Company's insurance subsidiaries will continue to be able to
make sufficient funds available to the Company without regulatory approval or
that the Company will be able to obtain any regulatory approvals that may be
required from time to time.
LIMITATIONS ON ABILITY TO PAY DIVIDENDS ON CONVERTIBLE PREFERRED STOCK AND
COMMON STOCK
In addition to the limitations imposed on the Company's insurance
subsidiaries' ability to pay dividends under applicable insurance laws, under
Delaware law PennCorp is permitted to pay dividends on its capital stock,
including the Convertible Preferred Stock and the Common Stock issuable upon
conversion thereof, only out of its surplus, or, in the event that it has no
surplus, out of its net profits for the year in which a dividend is declared or
for the immediately preceding fiscal year. Surplus is defined as the excess of a
company's total assets over the sum of its total liabilities plus the par value
of its outstanding capital stock. In order to pay cash dividends, PennCorp must
have surplus or net profits equal to the full amount of the cash dividend at the
time such dividend is declared. In determining PennCorp's ability to pay
dividends, Delaware law permits the Board of Directors to revalue its assets and
liabilities from time to time to their current fair market value in order to
create surplus. PennCorp cannot determine what the fair market value of its
assets and liabilities will be in the future and, accordingly, there can be no
assurance that PennCorp will be able to continue paying dividends.
Further, PennCorp's ability to pay dividends is limited by the terms of its
outstanding 9 1/4% Senior Subordinated Notes due 2003 and its $3.375 Convertible
Preferred Stock, par value $.01 per share (the "$3.375 Convertible Preferred
Stock"), and from time to time may be limited by the terms of its other
indebtedness.
REGULATION
Insurance companies are subject to governmental regulation in each of the
jurisdictions in which they conduct business. Insurance regulatory agencies have
broad administrative power with respect to all aspects of an insurance company's
business, including rates, policy forms, dividend payments, capital adequacy and
the amount and type of investments it may have. These regulations are intended
primarily to protect policyholders rather than securityholders.
3
<PAGE> 5
In certain states, the Company's insurance subsidiaries' licenses are
subject to restrictions, including restrictions on the amount of new business
that may be written without prior regulatory approval. Substantially all of
these restrictions were imposed with respect to events occurring prior to the
Company's acquisition of the affected subsidiaries. These restrictions have not
had a material adverse effect on the Company's results of operation. There can
be no assurance that the Company's insurance subsidiaries will not become
subject to additional and/or more material restrictions in these or other
states.
The insurance regulatory framework continues to be subject to scrutiny by
the National Association of Insurance Commissioners, state legislatures and the
United States Congress. No assurance can be given that future legislative or
regulatory changes resulting from such activity will not adversely affect the
Company.
RATINGS
Claims-paying and financial strength ratings, such as those assigned by
A.M. Best Company ("A.M. Best") and other independent insurance rating
organizations, have become an increasingly important factor in establishing the
competitive position of insurance companies, especially for companies like the
Company's recently acquired subsidiary, United Companies Life Insurance Company
("UC Life"), that sell deferred annuity products. Management believes that the
A.M. Best rating held by UC Life is important to maintaining public confidence
in UC Life. A lower rating could materially and adversely affect UC Life's
ability to market its products, particularly annuities sold through financial
institutions, and could increase the surrender of its annuity policies. Both of
these consequences could, depending upon the extent thereof, have a material
adverse effect on UC Life's liquidity and, under certain circumstances, net
income, the result of which could have a material adverse effect on the Company.
ABSENCE OF PUBLIC MARKET FOR THE CONVERTIBLE PREFERRED STOCK
The Convertible Preferred Stock currently trades in the PORTAL Market.
However, shares of Convertible Preferred Stock sold pursuant to this Prospectus
will not thereafter be eligible for trading in the PORTAL Market. PennCorp does
not intend to list the Convertible Preferred Stock on any securities exchange or
to seek approval for quotation of the Convertible Preferred Stock through any
automated quotation system. Although the Initial Purchasers have advised
PennCorp that they intend to make a market in the Convertible Preferred Stock,
they are not obligated to do so and may suspend any such market-making
activities at any time and without prior notice. Accordingly, there can be no
assurance that an active market for the Convertible Preferred Stock will develop
or be maintained. Further, future trading prices of the Convertible Preferred
Stock will depend on many factors, including, among other things, prevailing
interest rates, the Company's operating results, the price of the Common Stock
and the market for similar securities.
USE OF PROCEEDS
The Company will not receive any of the proceeds from the sale of the
Securities by the Selling Securityholders. All of the expenses incurred in
connection with the registration of the Securities offered hereby will be paid
by the Company, except for brokers' commissions, underwriters' discounts or
commissions, and the fees and expenses of any counsel for the Selling
Securityholders, which will be paid by the Selling Securityholders.
4
<PAGE> 6
RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
The Company's ratio of earnings to fixed charges and preferred stock
dividends for each of the periods indicated is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
- ---------------------------------------------- ----------------
1991 1992 1993 1994 1995 1995 1996
- ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
1.55x 1.95x 6.25x 3.53x 3.55x 3.42x 3.52x
</TABLE>
For purposes of the foregoing ratio, earnings consist of pre-tax income
from operations plus fixed charges (excluding capitalized interest). The
Company's fixed charges consist of (i) interest, whether expensed or
capitalized, (ii) amortization of deferred debt issuance costs, including any
discount or premium, whether expensed or capitalized, and (iii) the component of
rental expense determined by management to be representative of the interest
factor thereon. Preferred stock dividends have been adjusted to an amount equal
to the pre-tax earnings necessary to provide for the dividends.
SELLING SECURITYHOLDERS
The Registration Statement of which the Prospectus is a part has been filed
pursuant to Rule 415 under the Securities Act to afford the holders of the
Securities the opportunity to sell their Securities in public transactions
rather than pursuant to an exemption from the registration and prospectus
delivery requirements of the Securities Act. In order to avail itself of that
opportunity, a holder must notify the Company in writing of its intention to
sell Securities and request the Company to file a supplement to this Prospectus
or an amendment to the Registration Statement identifying such holder as a
Selling Securityholder and disclosing such other information concerning the
Selling Securityholder and the Securities to be sold as may then be required by
the Securities Act and the rules and regulations thereunder, as applicable. No
offer or sale pursuant to this Prospectus may be made by any holder until such a
request has been made and until any such supplement has been filed or any such
amendment has become effective. The holders of Securities who have made such a
request and as to which any such required supplement or amendment has been filed
or become effective are referred to herein as the "Selling Securityholders."
As of the date of this Prospectus, no holder of Securities has made such a
request and, accordingly, no Selling Securityholders are named herein. The
Company will from time to time supplement or amend this Prospectus to reflect
the required information concerning any Selling Securityholders.
PLAN OF DISTRIBUTION
The Selling Securityholders may sell the Securities to which this
Prospectus relates in whole or from time to time in part through underwriters or
dealers, through brokers or other agents, or directly to one or more purchasers,
at market prices prevailing at the time of sale or at prices otherwise
negotiated. PennCorp will receive no proceeds from the sale of the Securities by
the Selling Securityholders. The Company will pay all expenses incident to the
registration of the Securities offered hereby, except for brokers' commissions,
underwriters' discounts or commissions, and the fees and expenses of any counsel
for the Selling Securityholders.
The Convertible Preferred Stock currently trades in the PORTAL Market.
However, shares of Convertible Preferred Stock sold pursuant to this Prospectus
will not thereafter be eligible for trading in the PORTAL Market. PennCorp does
not intend to list the Convertible Preferred Stock on any securities exchange or
to seek approval for quotation of the Convertible Preferred Stock through any
automated quotation system. Although the Initial Purchasers have advised
PennCorp that they intend to make a market in the Convertible Preferred Stock,
they are not obligated to do so and may suspend any such market-making
activities at any time and without prior notice. Accordingly, there can be no
assurance that an active market for the Convertible Preferred Stock will develop
or be maintained.
5
<PAGE> 7
The Company will issue the shares of Common Stock issuable upon conversion
of the Convertible Preferred Stock to registered holders of the Convertible
Preferred Stock upon the conversion thereof. The Common Stock is listed on the
NYSE and trades under the symbol "PFG."
In order to comply with the securities laws of certain states, if
applicable, the Securities will be sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain states the
Securities may not be sold unless they have been registered or qualified for
sale in the applicable state or an exemption from the registration or
qualification requirement is available and is complied with.
The Selling Securityholders and any broker, dealer or underwriter that
participates with the Selling Securityholders in the distribution of the
Securities may be deemed to be an "underwriter" within the meaning of the
Securities Act, and any commissions received by them and any profit on the
resale of such Securities purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act.
Under applicable rules and regulations under the Exchange Act, any persons
engaged in a distribution of the Securities offered hereby may not
simultaneously engage in market making activities or other purchases with
respect to the Securities for a period of nine business days in the case of
Convertible Preferred Stock and for a period of two business days in the case of
Common Stock prior to the commencement of such distribution. In addition, and
without limiting the foregoing, each Selling Securityholder will be subject to
applicable provisions of the Exchange Act and the rules and regulations
thereunder, including, without limitation, Rules 10b-2, 10b-6 and 10b-7, which
provisions may limit the timing of purchases and sales of the Securities by the
Selling Securityholders. All of the foregoing may affect the marketability of
the Securities.
In addition, any securities covered by this Prospectus which qualify for
sale pursuant to Rule 144 or Rule 144A under the Securities Act may be sold
under Rule 144 or Rule 144A rather than pursuant to this Prospectus. There is no
assurance that any Selling Securityholder will sell any or all of the
Convertible Preferred Stock or Common Stock described herein, and any Selling
Securityholder may transfer, devise or make a gift of such securities by other
means not described herein.
The Company and the Selling Securityholders are obligated to indemnify each
other against certain liabilities arising under the Securities Act.
DESCRIPTION OF THE CONVERTIBLE PREFERRED STOCK
The following summary description of the Convertible Preferred Stock is
qualified in its entirety by reference to the Certificate of Designation
governing the Convertible Preferred Stock, a copy of which has been filed as an
exhibit to the Registration Statement of which this Prospectus is a part.
GENERAL
The Convertible Preferred Stock is a series of preferred stock consisting
of 2,875,000 shares.
DIVIDENDS
Holders of Convertible Preferred Stock are entitled to receive, when, as
and if declared by the Board of Directors out of legally available funds, cash
dividends at an annual rate of $3.50 per share, payable quarterly in arrears on
February 1, May 1, August 1 and November 1 of each year, beginning November 1,
1996. If that date is a Saturday, Sunday or legal holiday, however, the dividend
will be payable on the next business day. Dividends will accrue and be
cumulative from the most recent date to which dividends have been paid or, if
none have been paid, from August 7, 1996 and will be payable to holders of
record on the record date for each dividend payment fixed by the Board of
Directors.
The Convertible Preferred Stock has priority as to dividends over the
Common Stock and any other series or class of the Company's stock that ranks
junior to the Convertible Preferred Stock as to dividends ("Junior Dividend
Stock"). No dividend (other than dividends payable solely in Common Stock, any
Junior Dividend Stock or warrants or other rights to acquire such Common Stock
or Junior Dividend Stock) may be paid or set
6
<PAGE> 8
apart for payment on, and no purchase, redemption or other acquisition shall be
made by the Company of, the Common Stock or Junior Dividend Stock unless all
accrued and unpaid dividends on the Convertible Preferred Stock, including the
full dividend for the then-current quarterly dividend period, shall have been
paid or declared and set apart for payment without interest. The Series B
Preferred Stock, par value $.01 per share (the "Series B Preferred Stock"), and
Series C Preferred Stock, par value $.01 per share (the "Series C Preferred
Stock"), of the Company issued in connection with the acquisition of Salem Life
Insurance Corporation, Integon Life Insurance Corporation and Georgia
International Life Insurance Company do not require the payment of cash
dividends and, accordingly, effectively rank junior to the Convertible Preferred
Stock as to dividends.
Except as provided below, the Company may not pay dividends on any class or
series of stock, if hereafter issued, having parity with the Convertible
Preferred Stock as to dividends ("Parity Dividend Stock") unless it has paid or
declared and set apart for payment or contemporaneously pays or declares and
sets apart for payment all accrued and unpaid dividends for all prior dividend
payment periods on the Convertible Preferred Stock. In addition, except as
provided below, the Company may not pay dividends on the Convertible Preferred
Stock unless it has paid or declared and set apart for payment or
contemporaneously pays or declares and sets apart for payment all accrued and
unpaid dividends for all prior dividend payment periods on the Parity Dividend
Stock. Whenever all accrued dividends in respect of prior dividend payment
periods are not paid in full on Convertible Preferred Stock and on any Parity
Dividend Stock, all dividends declared on the Convertible Preferred Stock and
the Parity Dividend Stock will be declared and made pro rata so that the amount
of dividends declared on the Convertible Preferred Stock and the Parity Dividend
Stock will bear the same ratio that accrued and unpaid dividends in respect of
prior dividend payment periods on the Convertible Preferred Stock and the Parity
Dividend Stock bear to each other. The $3.375 Convertible Preferred Stock is
Parity Dividend Stock and accrues an aggregate of $7.8 million in dividends per
annum, which dividends are payable quarterly in arrears.
The Company may not purchase any shares of the Convertible Preferred Stock
or any Parity Dividend Stock (except for consideration payable in Common Stock
or Junior Dividend Stock) or redeem fewer than all the shares of the Convertible
Preferred Stock and Parity Dividend Stock then outstanding if the Company has
failed to pay any accrued dividend on the Convertible Preferred Stock or any
Parity Dividend Stock on a stated payment date. Notwithstanding the foregoing,
in such event, the Company may purchase or redeem fewer than all the shares of
the Convertible Preferred Stock and Parity Dividend Stock if such repurchase or
redemption is made pro rata so that the amounts purchased or redeemed bear to
each other the same ratio that the required redemption payments on the shares of
the Convertible Preferred Stock and any Parity Dividend Stock then outstanding
bear to each other.
If the Company hereafter issues any series or class of stock that ranks
senior as to dividends to the Convertible Preferred Stock ("Senior Dividend
Stock") and fails to pay or declare and set apart for payment accrued and unpaid
dividends on any Senior Dividend Stock (except to the extent allowed by the
terms of the Senior Dividend Stock), the Company may not pay or declare and set
apart for payment any dividend on the Convertible Preferred Stock unless and
until all accrued and unpaid dividends on the Senior Dividend Stock, including
the full dividends for the then current dividend period, have been paid or
declared and set apart for payment without interest. The Company has no Senior
Dividend Stock outstanding on the date of this Prospectus.
The dividend payable on Convertible Preferred Stock for each quarterly
dividend period is computed by dividing the annual dividend amount by four. The
amount of dividends payable for the initial dividend period and for any period
shorter than a full quarterly dividend period is computed on the basis of a
360-day year of twelve 30-day months. No interest is payable on any Convertible
Preferred Stock dividend that may be in arrears.
Under Delaware law, the Company may declare and pay dividends or make other
distributions on its capital stock only out of surplus, as defined in the
Delaware General Corporation Law, or if no surplus is available, out of its net
profits for the fiscal year in which the dividend or distribution is declared
and the preceding fiscal year. No dividends or distributions may be declared or
paid if the Company is or would be
7
<PAGE> 9
rendered insolvent by virtue of the dividend or distribution, or if the
declaration, payment or distribution would contravene the Company's Second
Restated Certificate of Incorporation, as amended. The Company's ability to pay
dividends on its capital stock, including the Convertible Preferred Stock, is
dependent upon the receipt of funds from its subsidiaries. Dividends and other
payments by the Company's insurance subsidiaries are regulated by the insurance
laws of their respective jurisdictions of domicile. See "Risk
Factors -- Reliance on Dividends and Other Payments from Insurance
Subsidiaries."
LIQUIDATION RIGHTS
In the case of the voluntary or involuntary liquidation, dissolution or
winding up of the Company, subject to the payment in full, or until provision
has been made for the payment in full, of all claims of creditors of the
Company, holders of Convertible Preferred Stock are entitled to receive the
liquidation preference of $50.00 per share, plus an amount equal to any accrued
and unpaid dividends, whether or not declared, to the payment date, before any
payment or distribution is made to the holders of Common Stock or any other
series or class of stock hereafter issued that ranks junior as to liquidation
rights to the Convertible Preferred Stock ("Junior Liquidation Stock"). Holders
of Convertible Preferred Stock are not entitled to receive the liquidation
preference of their shares until the liquidation preference of any other series
or class of stock hereafter issued that ranks senior as to liquidation rights to
the Convertible Preferred Stock ("Senior Liquidation Stock"), if any, has been
paid in full. The holders of Convertible Preferred Stock and any series or class
of stock hereafter issued that ranks on a parity as to the liquidation rights
with the Convertible Preferred Stock ("Parity Liquidation Stock") are entitled
to share ratably, in accordance with the respective preferential amounts payable
on their stock, in any distribution (after payment of the liquidation preference
on any Senior Liquidation Stock) that is not sufficient to pay in full the
aggregate liquidation preference on both the Convertible Preferred Stock and any
Parity Liquidation Stock.
After payment in full of the liquidation preference plus any accrued and
unpaid dividends on the Convertible Preferred Stock, the holders will not be
entitled to any further participation in any distribution of assets by the
Company. Neither a consolidation or merger of the Company with another entity
nor a sale or transfer of all or part of the Company's assets for cash,
securities or other property will be considered a liquidation, dissolution or
winding up of the Company.
Each of the $3.375 Convertible Preferred Stock ($116.9 million aggregate
liquidation preference as of June 30, 1996), the Series B Preferred Stock, par
value $.01 per share ($14.0 million aggregate liquidation preference as of June
30, 1996), and the Series C Preferred Stock, par value $.01 per share ($19.4
million aggregate liquidation preference as of June 30, 1996), is Parity
Liquidation Stock.
VOTING RIGHTS
The holders of Convertible Preferred Stock have no voting rights except as
described below or as required by law. In exercising any voting rights, each
outstanding share of Convertible Preferred Stock is entitled to one vote,
although shares held by the Company or any entity controlled by the Company have
no voting rights.
Whenever dividends on the Convertible Preferred Stock are in arrears in
aggregate amount equal to at least six quarterly dividends (whether or not
consecutive), the size of the Company's Board of Directors will be increased by
two, and the holders of Convertible Preferred Stock, voting separately as a
class together with holders of Parity Dividend Stock, will be entitled to elect
the two additional directors to the Board of Directors at, subject to certain
limitations, any annual meeting of stockholders at which directors are to be
elected held during the period when the dividends remain in arrears or, under
certain circumstances, at a special meeting of stockholders. These voting rights
will terminate when all dividends in arrears and for the current quarterly
period have been paid in full or declared and set apart for payment. The term of
office of the additional directors so elected will terminate immediately upon
that payment or provision for payment.
In addition, so long as any Convertible Preferred Stock is outstanding, the
Company will not, without the affirmative vote or consent of the holders of at
least 66 2/3% of all outstanding shares of Convertible Preferred Stock and
outstanding Parity Dividend Stock, voting as a single class (i) amend, alter or
repeal (by merger or otherwise) any provision of the Second Restated Certificate
of Incorporation, as amended, or the by-laws so as
8
<PAGE> 10
to affect adversely the relative rights, preferences, qualifications,
limitations or restrictions of the Convertible Preferred Stock or (ii) effect
any reclassification of the Convertible Preferred Stock.
REDEMPTION AT OPTION OF THE COMPANY
The Convertible Preferred Stock may not be redeemed prior to August 2,
1999. Thereafter, the Convertible Preferred Stock may be redeemed by the
Company, at its option, in whole or in part at any time, if redeemed during the
12-month period beginning August 1 (August 2 in the case of 1999), of any year
specified below, at the following redemption prices:
<TABLE>
<CAPTION>
PRICE PRICE
YEAR PER SHARE YEAR PER SHARE
--------- --------- -------- ---------
<S> <C> <C> <C>
1999........................... $ 52.45 2003........................... $ 51.05
2000........................... 52.10 2004........................... 50.70
2001........................... 51.75 2005........................... 50.35
2002........................... 51.40 2006 and thereafter............ 50.00
</TABLE>
plus in each case accrued and unpaid dividends, whether or not declared, to the
redemption date.
If fewer than all the outstanding shares of Convertible Preferred Stock are
to be redeemed, the Company will select those shares to be redeemed pro rata or
in such other manner as the Board of Directors may determine. There is no
mandatory redemption or sinking fund obligation for the Convertible Preferred
Stock. In the event that the Company has failed to pay accrued and unpaid
dividends on the Convertible Preferred Stock, it may not redeem less than all of
the outstanding shares of the Convertible Preferred Stock until all accrued and
unpaid dividends have been paid in full.
Notice of redemption will be mailed at least 15 days but not more than 60
days before the redemption date to each holder of record of Convertible
Preferred Stock to be redeemed at the address shown on the stock transfer books.
After the redemption date, dividends will cease to accrue on the shares of
Convertible Preferred Stock called for redemption and all rights of the holders
of those shares will terminate, except the conversion rights to the extent
described below and the right to receive the redemption price plus accrued and
unpaid dividends, whether or not declared, to the redemption date, without
interest.
CONVERSION RIGHTS
Each holder of Convertible Preferred Stock has the right any time after
November 5, 1996, at the holder's option, to convert any or all shares into
Common Stock at any time at a conversion price (subject to adjustment as
described below) of $34.90 per share of underlying Common Stock. If the
Convertible Preferred Stock is called for redemption, the conversion right will
terminate at the close of business on the redemption date fixed by the Board of
Directors.
If shares of Convertible Preferred Stock not called for redemption are
surrendered for conversion during the period between the close of business on
any dividend record date and the opening of business on any corresponding
dividend payment date such shares so surrendered must be accompanied by payment
of an amount equal to the dividend payable on such shares on such dividend
payment date. No such payment will be required to accompany shares of
Convertible Preferred Stock called for redemption and surrendered during such
period. A holder of shares of Convertible Preferred Stock on a dividend record
date who (or whose transferee) tenders any such shares for conversion into
shares of Common Stock on such dividend payment date will receive the dividend
payable by the Company on such shares of Convertible Preferred Stock on such
date, and the converting holder need not include payment of the amount of such
dividend upon surrender of shares of Convertible Preferred Stock for conversion.
Except for shares of Convertible Preferred Stock surrendered for conversion on a
dividend payment date, the Company will make no payment or allowance for accrued
and unpaid dividends, whether or not in arrears, on converted shares or for
dividends on the shares of Common Stock issued upon such conversion. No
fractional shares of Common Stock will be issued upon conversion but, in lieu
thereof, an appropriate amount will be paid in cash based on the last reported
sale price for the Common Stock on the day of conversion.
9
<PAGE> 11
The conversion price is subject to adjustment in certain events, including
(i) the payment of a dividend on any class of the Company's capital stock in
shares of Common Stock; (ii) subdivisions or combinations of the Common Stock;
(iii) the issuance to all holders of Common Stock of certain rights or warrants
(expiring within 45 days after the record date for determining stockholders
entitled to receive them) to subscribe for or purchase Common Stock at a less
than current market price; or (iv) the payment of a dividend to all holders of
Common Stock of any shares of capital stock of the Company or its subsidiaries
(other than Common Stock) or evidences of indebtedness, cash (excluding cash
dividends payable solely in cash that may from time to time be fixed by the
Board of Directors, or dividends or distributions in connection with
liquidation, dissolution or winding up of the Company), other assets or rights
or warrants to subscribe for or purchase any securities (other than those
referred to above); or (v) the issuance of all holders of Common Stock of
securities convertible into or exchangeable for Common Stock (other than
pursuant to transactions described above) for a consideration per share of
Common Stock deliverable upon a conversion or exchange of the securities less
than the current market price per share on the date of issuance of the
securities. No adjustment of the conversion price will be required to be made
until cumulative adjustments amount to 1% or more of the conversion price as
last adjusted, and any adjustment below 1% will be carried forward.
The Company from time to time may reduce the conversion price by any amount
for any period of time if the period is at least 20 days and if the reduction is
irrevocable during the period. Whenever the conversion price is so reduced, the
Company shall mail to holders of record of the Convertible Preferred Stock a
notice of the reduction at least 15 days before the date the reduced conversion
Price takes effect, stating the reduced conversion price and the period it will
be in effect.
In case of any reclassification of the Common Stock, any consolidation of
the Company with, or merger of the Company into, any other entity, any merger of
any entity into the Company (other than a merger that does not result in a
reclassification, conversion, exchange or cancellation of the outstanding shares
of Common Stock), any sale or transfer of all or substantially all of the assets
of the Company or any compulsory share exchange whereby the Common Stock is
converted into other certain securities, cash or other property, then the holder
of each share of Convertible Preferred Stock then outstanding shall have the
right thereafter, during the period that the Convertible Preferred Stock shall
be convertible, to convert that share only into the kind and amount of
securities, cash and other property receivable upon the reclassification,
consolidation, merger, sale, transfer or share exchange by a holder of the
number of shares of Common Stock into which one share of Convertible Preferred
Stock would have been convertible immediately prior to the reclassification,
consolidation, merger, sale, transfer or share exchange.
OTHER PROVISIONS
The shares of Convertible Preferred Stock have been duly and validly issued
and are fully paid and nonassessable.
The holders of shares of Convertible Preferred Stock have no preemptive
rights with respect to any securities of the Company.
The registrar, transfer agent, conversion agent, and dividend disbursing
agent for the Convertible Preferred Stock and the transfer agent and registrar
for the Common Stock issuable upon conversion thereof is First Chicago Trust
Company of New York.
LEGAL MATTERS
The validity of the Convertible Preferred Stock and the shares of Common
Stock issuable upon conversion thereof will be passed upon for the Company by
Weil, Gotshal & Manges LLP.
10
<PAGE> 12
EXPERTS
The consolidated financial statements and the related financial statement
schedules of the Company and its subsidiaries as of December 31, 1995 and 1994
and for each of the years in the three-year period ended December 31, 1995, have
been audited by KPMG Peat Marwick LLP, independent certified public accountants.
Such financial statements and the related financial statement schedules have
been incorporated by reference herein in reliance upon the reports of KPMG Peat
Marwick LLP and upon the authority of said firm as experts in accounting and
auditing. The reports of KPMG Peat Marwick LLP refer to the adoption of
Statement of Financial Accounting Standards No. 115 effective January 1, 1994.
With respect to the Company's unaudited interim financial information for
the periods ended June 30, 1996 and 1995, and for the periods ended March 31,
1996 and 1995, incorporated by reference herein, KPMG Peat Marwick LLP have
reported that they applied limited procedures in accordance with professional
standards for a review of such information. However, their separate reports
included in the Company's quarterly reports on Form 10-Q for the quarter ended
June 30, 1996, and on Form 10-Q and Form 10-Q/A for the quarter ended March 31,
1996, incorporated by reference herein, states that they did not audit and they
do not express an opinion on that interim financial information. Accordingly,
the degree of reliance on their report on such information should be restricted
in light of the limited nature of the review procedures applied. The accountants
are not subject to the liability provisions of section 11 of the Securities Act
for their reports on the unaudited interim financial information because those
reports are not a "report" or a "part" of the registration statement prepared or
certified by the accountants within the meaning of sections 7 and 11 of the
Securities Act.
The financial statements of Integon Life Corporation and subsidiaries as of
December 31, 1994 and 1993 and for the years ended December 31, 1994 and 1993
and for the period February 13, 1992 to December 31, 1992, and of the Life
Operations of Integon for the period January 1, 1992 to February 12, 1992, have
been audited by Deloitte & Touche LLP, independent auditors. Such financial
statements have been incorporated by reference herein in reliance upon the
report of Deloitte & Touche LLP, given upon the authority of said firm as
experts in accounting and auditing.
The combined balance sheets of the Insurance Operations of I.C.H.
Corporation Acquired by Southwestern Financial Corporation as of December 14,
1995 and December 31, 1994, and the related combined statements of earnings
(loss), business equity and cash flows for the period January 1, 1995 through
December 14, 1995 and the years ended December 31, 1994 and 1993, included in
this Prospectus, have been included herein in reliance on the report of Coopers
& Lybrand L.L.P., independent accountants, given on the authority of that firm
as experts in accounting and auditing.
The financial statements of United Companies Life Insurance Company and
subsidiary as of December 31, 1995 and 1994 and for each of the three years in
the period ended December 31, 1995 have been audited by Deloitte & Touche LLP,
independent auditors. Such financial statements have been incorporated by
reference herein in reliance upon the reports of Deloitte & Touche LLP, given
upon the authority of said firm as experts in accounting and auditing.
11
<PAGE> 13
INDEX TO FINANCIAL STATEMENTS
Insurance Operations of I.C.H. Corporation Acquired by Southwestern Financial
Corporation
Audited Combined Financial Statements as of December 14, 1995 and December
31, 1994 and for the period January 1, 1995 through December 14, 1995 and
the years ended December 31, 1994 and 1993
Independent Auditor's Report....................................F-2
Combined Statements of Earnings (Loss)..........................F-3
Combined Balance Sheets.........................................F-4
Combined Statements of Business Equity..........................F-5
Combined Statements of Cash Flows...............................F-6
Notes to Combined Financial Statements..........................F-7
F-1
<PAGE> 14
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Southwestern Financial Corporation:
We have audited the accompanying combined balance sheets of the Insurance
Operations of I.C.H. Corporation Acquired by Southwestern Financial Corporation
as of December 14, 1995 and December 31, 1994, and the related combined
statements of earnings (loss), business equity and cash flows for the period
from January 1, 1995 to December 14, 1995 and the years ended December 31, 1994
and 1993. 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
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of the Insurance
Operations of I.C.H. Corporation Acquired by Southwestern Financial Corporation
as of December 14, 1995 and December 31, 1994, and the combined results of their
operations and their cash flows for the period from January 1, 1995 to December
14, 1995 and the years ended December 31, 1994 and 1993, in conformity with
generally accepted accounting principles.
As discussed in Note 6 to the financial statements, the Company changed its
method of assessing the recoverability of excess of cost over net assets
acquired in 1994.
As more fully described in Notes 12 and 4 to these combined financial
statements, effective January 1, 1993 and December 31, 1993, the Company adopted
Statements of Financial Accounting Standards No. 106, "Employers' Accounting for
Post-retirement Benefits Other Than Pensions" and No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," respectively.
COOPERS & LYBRAND L.L.P.
Dallas, Texas
July 9, 1996
F-2
<PAGE> 15
INSURANCE OPERATIONS OF I.C.H. CORPORATION
ACQUIRED BY SOUTHWESTERN FINANCIAL CORPORATION
COMBINED STATEMENTS OF EARNINGS (LOSS)
FOR THE PERIOD FROM JANUARY 1, 1995 TO DECEMBER 14, 1995 AND
THE YEARS ENDED DECEMBER 31, 1994 AND 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1995 YEAR ENDED DECEMBER 31,
TO DECEMBER 14, ------------------------
1995 1994 1993
--------------- --------- --------
<S> <C> <C> <C>
Revenues:
Premium income...................................... $ 188,457 $ 191,035 $180,805
Interest sensitive policy product charges........... 53,758 47,614 57,847
Net investment income............................... 192,146 137,150 143,114
Realized investment gains (losses).................. (561) (73,065) 26,824
Equity in earnings of equity investees and limited
partnerships..................................... 5,802 3,974 11,160
Other income (loss)................................. (2,457) 3,797 3,842
(Gain) loss on sale of subsidiaries................. 145 (4,200) --
--------- --------- --------
437,290 306,305 423,592
--------- --------- --------
Benefits, expenses and costs:
Policyholder benefits............................... 313,569 245,781 244,653
Amortization of deferred policy acquisition costs
and value of business acquired................... 46,712 50,338 36,602
Other operating expenses............................ 55,267 57,638 77,646
Interest expense.................................... -- -- 1,516
Amortization of costs in excess of net assets
acquired......................................... 11,540 9,010 9,010
Change in accounting for costs in excess of net
assets acquired.................................. -- 210,683 --
--------- --------- --------
427,088 573,450 369,427
--------- --------- --------
Operating earnings (loss) from continuing operations
before income taxes................................. 10,202 (267,145) 54,165
Income tax provision (credit)......................... 9,966 (1,042) 20,759
--------- --------- --------
Operating earnings (loss) from continuing
operations.......................................... 236 (266,103) 33,406
Earnings (loss) from operations not acquired.......... 2,359 (2,523) 445
--------- --------- --------
Earnings (loss) before cumulative effect of changes in
accounting methods.................................. 2,595 (268,626) 33,851
Cumulative effect of changes in accounting methods.... -- -- (700)
--------- --------- --------
Net earnings (loss)................................... $ 2,595 $(268,626) $ 33,151
========= ========= ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE> 16
INSURANCE OPERATIONS OF I.C.H. CORPORATION
ACQUIRED BY SOUTHWESTERN FINANCIAL CORPORATION
COMBINED BALANCE SHEETS
AS OF DECEMBER 14, 1995 AND DECEMBER 31, 1994
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 14, DECEMBER 31,
1995 1994
------------ ------------
<S> <C> <C>
Investments:
Fixed maturities:
Available for sale at fair value.............................. $1,161,383 $1,267,511
Held to maturity at amortized cost............................ 14,006 15,915
Affiliated, at amortized cost................................. -- 18,287
Equity securities available for sale at fair value............... 2,173 10,138
Mortgage loans on real estate at amortized cost.................. 104,119 123,048
Real estate at lower of cost or fair value....................... 21,711 31,335
Policy loans..................................................... 137,466 141,053
Collateral loans................................................. 41,308 49,465
Investments in limited partnerships.............................. 26,903 25,005
Cash and short-term investments.................................. 151,268 175,360
Other invested assets............................................ 7,518 8,514
---------- ----------
Total investments........................................ 1,667,855 1,865,631
Due from reinsurers................................................ 152,866 199,035
Notes and accounts receivable and uncollected premiums............. 881 2,140
Accrued investment income.......................................... 17,169 23,827
Deferred policy acquisition costs.................................. 137,019 158,341
Value of business acquired......................................... 56,558 62,984
Deferred income taxes.............................................. 6,908 68,348
Costs in excess of net assets acquired, net of accumulated
amortization..................................................... 66,111 77,650
Net assets of operations not acquired.............................. -- 25,962
Other assets....................................................... 13,331 24,079
---------- ----------
$2,118,698 $2,507,997
========== ==========
LIABILITIES AND BUSINESS EQUITY
Insurance liabilities:
Future policy benefits and other policy liabilities.............. $ 632,243 $ 629,121
Universal life and investment contract liabilities............... 1,094,660 1,516,481
Due to related parties............................................. -- 1,158
Federal income taxes currently payable............................. 6,719 3,640
Other liabilities.................................................. 49,904 64,370
---------- ----------
1,783,526 2,214,770
Commitments and contingencies
Business equity.................................................... 335,172 293,227
---------- ----------
Total liabilities and business equity.................... $2,118,698 $2,507,997
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE> 17
INSURANCE OPERATIONS OF I.C.H. CORPORATION
ACQUIRED BY SOUTHWESTERN FINANCIAL CORPORATION
COMBINED STATEMENTS OF BUSINESS EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1995 YEAR ENDED DECEMBER 31,
TO DECEMBER 14, -----------------------
1995 1994 1993
--------------- --------- --------
<S> <C> <C> <C>
Balance at beginning of period......................... $ 293,227 $ 637,037 $671,455
Net earnings (loss).................................. 2,595 (268,626) 33,151
Deemed dividend on transfer of tax benefits related
to the sale of Southwestern Life to SWF........... (12,764) -- --
Deemed contribution (dividend) on transfer of
investments to I.C.H. Corporation................. (8,647) -- 53,219
Deemed dividend from loss of tax benefits which will
not be recoverable from intercompany tax
allocation due to sale of companies to SWF........ (7,982) -- --
Deemed dividend from reinsurance recapture with
affiliate......................................... (1,080) -- (1,022)
Deemed contribution from reallocation of
postemployment accrual............................ 4,428
Deemed contribution on CFLIC transaction............. -- 12,813 --
Deemed contribution from intercompany tax
allocation........................................ 209 -- --
Dividends:
Paid in cash...................................... -- (22,300) (42,900)
Contribution of subsidiaries pursuant to
reorganization.................................. -- -- (74,530)
Dividend of investment in affiliate............... (13,330) -- --
Change in net unrealized investment gains (losses)... 78,516 (65,697) (2,336)
--------- --------- --------
Balance at end of period............................... $ 335,172 $ 293,227 $637,037
========= ========= ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE> 18
INSURANCE OPERATIONS OF I.C.H. CORPORATION
ACQUIRED BY SOUTHWESTERN FINANCIAL CORPORATION
COMBINED STATEMENTS OF CASH FLOWS
FOR THE PERIOD JANUARY 1, 1995 TO DECEMBER 14, 1995 AND
THE YEARS ENDED DECEMBER 31, 1994 AND 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1995 YEAR ENDED DECEMBER 31,
TO DECEMBER 14, -----------------------
1995 1994 1993
--------------- --------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Earnings (loss) before cumulative effect of changes in
accounting methods........................................... $ 2,595 $(268,626) $ 33,851
Items not requiring (providing) cash:
Adjustments relating to universal life and investment
products:
Interest credited to account balances...................... 128,739 66,566 88,067
Charges for mortality and administration................... (54,579) (53,507) (52,461)
Depreciation and amortization................................ 11,001 8,846 11,958
Change in accounting for costs in excess of net assets
acquired................................................... -- 210,683 --
Decrease in future policy benefits........................... (12,097) (20,855) (18,090)
Decrease (increase) in deferred policy acquisition costs and
value of business acquired................................. 4,633 5,827 (13,553)
Increase (decrease) in currently payable taxes............... 3,079 (5,237) (63,659)
Increase (decrease) in policy liabilities, other policyholder
funds, accounts payable and accrued expenses............... 3,354 19,048 (10,624)
Decrease in notes and accounts receivable and accrued
investment income.......................................... 8,531 4,348 3,241
Deferred income taxes........................................ 1,847 (8,314) 7,277
Equity in undistributed earnings of equity investees and
limited partnerships....................................... (5,802) (3,974) (11,072)
Earnings (loss) from operations not acquired, net of cash
dividends received......................................... (2,359) 4,923 5,455
Loss (gain) on sale of subsidiaries.......................... (145) 4,200 --
Realized investment (gains) losses........................... 561 73,065 (26,824)
Other, net................................................... (6,204) 125 (294)
--------- --------- ---------
Net cash provided (used) by operating activities........ 83,154 37,118 (46,728)
--------- --------- ---------
Cash flows from investing activities:
Sales of fixed maturities...................................... 281,623 399,582 390,889
Maturities and other redemptions of fixed maturities........... 315,569 183,307 494,994
Sales of other long-term assets................................ 388,932 157,421 330,226
Purchases of fixed maturities.................................. (404,302) (747,907) (866,939)
Purchases of other long-term invested assets................... (344,267) (80,172) (79,748)
Cash received on reinsurance transactions, net................. 101 25,158 95,067
Proceeds from sales of operations not acquired, net............ 35,055 -- --
Purchase of subsidiaries, net of cash acquired................. -- (3,589) --
--------- --------- ---------
Net cash provided (used) by investing activities........ 272,711 (66,200) 364,489
--------- --------- ---------
Cash flows from financing activities:
Policyholder contract deposits................................. 121,110 157,943 175,698
Policyholder contract withdrawals.............................. (501,067) (175,027) (393,191)
Repayment of surplus debenture................................. -- -- (141,842)
Dividends paid in cash......................................... -- (22,300) (42,900)
--------- --------- ---------
Net cash provided (used) by financing activities........ (379,957) (39,384) (402,235)
--------- --------- ---------
Net increase (decrease) in cash and short-term investments....... (24,092) (68,466) (84,474)
Cash and short-term investments at beginning of period........... 175,360 243,826 328,300
--------- --------- ---------
Cash and short-term investments at end of period................. $ 151,268 $ 175,360 $ 243,826
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE> 19
INSURANCE OPERATIONS OF I.C.H. CORPORATION
ACQUIRED BY SOUTHWESTERN FINANCIAL CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Organization and Basis of Presentation
Pursuant to a Stock Acquisition Agreement and with the approval of the U.S.
Bankruptcy Court, effective on December 14, 1995, Southwestern Financial
Corporation (SWF) acquired from I.C.H. Corporation (ICH) all of the outstanding
shares of common stock of Southwestern Life Insurance Company (Southwestern
Life) and Constitution Life Insurance Company (Constitution) for approximately
$260,000,000. Immediately prior to the sale, Southwestern Life paid a dividend
to its parent, SWL Holding Corporation, comprised of all the outstanding common
stock of Constitution which simultaneously acquired all the outstanding common
stock of Union Bankers Insurance Company (Union Bankers) from an affiliate. In
addition, a wholly-owned subsidiary of SWF acquired from ICH most of the assets
and liabilities of Facilities Management Installation, Inc. (FMI), which had
provided management services to ICH's insurance companies. The acquired
operations are collectively referred to as the ICH Companies. The ICH Companies
market and underwrite a broad range of life insurance, annuities and accident
and health products to individuals and groups through a sales force of
independent agents.
The accompanying combined financial statements include the consolidated
financial statements of Southwestern Life, Constitution and Union Bankers.
Marquette National Life Insurance Company (Marquette) is included from the date
of its acquisition by Union Bankers and Southwestern Life's 83% owned
subsidiary, ICH Funding Corp. (ICH Funding) is included from the date of its
acquisition. Certain former subsidiaries of Southwestern Life are presented
separately similar to discontinued operations (see Note 2). Assets and
liabilities of FMI are not included as they are not material to these financial
statements.
All significant intercompany accounts and transactions have been
eliminated.
The ICH Companies maintain their accounts in conformity with accounting
practices prescribed or permitted by state insurance regulatory authorities. In
the accompanying financial statements such accounts have been adjusted to
conform with generally accepted accounting principles (GAAP).
These financial statements have been presented on their historical GAAP
basis. No adjustments have been made to reflect any effects of the SWF purchase
discussed above.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make 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 management of the ICH Companies deem to be acutely sensitive to changes in
estimates include deferred policy acquisition costs, deferred income tax asset,
future policy benefits, policy and contract claims and value of business
acquired. In addition, the ICH Companies 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 estimates.
(b) Investments
Fixed maturity investments include bonds and preferred stocks with
mandatory redemption features. The ICH Companies classify all fixed maturity
investments as follows: (i) Available for sale securities represent securities
that may be sold prior to maturity due to changes that might occur in market
interest rate risks, changes in the security's prepayment risk, management of
the ICH Companies' income tax position, the ICH Companies' general liquidity
needs, the need to increase regulatory capital, changes in foreign currency
risk, or similar factors. Available for sale securities are carried at fair
value. (ii) Held to maturity securities represent securities such as
mortgage-backed private placements which are not readily marketable and which
the ICH
F-7
<PAGE> 20
INSURANCE OPERATIONS OF I.C.H. CORPORATION
ACQUIRED BY SOUTHWESTERN FINANCIAL CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Companies have the ability and positive intent to hold to maturity. Held to
maturity securities are carried at amortized cost. The ICH Companies may dispose
of such securities under certain unforeseen circumstances, such as issuer credit
deterioration or regulatory requirements.
Anticipated prepayments on mortgage-backed securities are taken into
consideration in determining estimated future yields on such securities.
Equity securities include investments in common stocks and non-redeemable
preferred stocks and are carried at fair value. Policy loans and collateral
loans are stated at their current unpaid principal balance, net of unamortized
discount, if any. Short-term investments include commercial paper, invested cash
and other investments purchased with maturities generally less than three months
and are carried at amortized cost. The ICH Companies consider all short-term
investments to be cash equivalents.
Mortgage loans are stated at the aggregate unpaid principal balances, less
unamortized discount and valuation allowances. Fees received and costs incurred
with origination of mortgage loans are deferred and amortized as yield
adjustments over the remaining lives of the mortgages. Real estate,
substantially all of which was acquired through foreclosure, is recorded at the
lower of fair value, minus estimated costs to sell, or cost. If the fair value
of the foreclosed real estate minus estimated costs to sell is less than cost, a
valuation allowance is provided for the deficiency. Increases or decreases in
the valuation allowance are charged or credited to income.
Investments in limited partnerships and 20% to 50% interests in the common
stocks of other entities, whose affairs are not controlled by the ICH Companies'
(equity investees), are reflected on the equity method, or at cost, adjusted for
the ICH Companies' share, after allowance for possible dilution, of the
undistributed earnings and losses (both realized and unrealized) since
acquisition.
The ICH Companies regularly evaluate investments based on current economic
conditions, past credit loss experience and other circumstances. A decline in
net realizable value that is other than temporary is recognized as a realized
investment loss and a reduction in the cost basis of the investment. The Company
discounts expected cash flows in the computation of net realizable value of its
investments, other than certain mortgage-backed securities. In those
circumstances where the expected cash flows of residual interest and
interest-only mortgage-backed securities, discounted at a risk-free rate of
return, result in an amount less than the carrying value, a realized loss is
reflected in an amount sufficient to adjust the carrying value of a given
security to its fair value.
Net realized investment gains and losses, including gains and losses on
foreign currency transactions and held for sale securities, are included in the
determination of net earnings. Unrealized investment gains and losses on
available for sale securities and marketable equity securities are charged or
credited directly to business equity. The specific identification method is used
to account for the disposition of investments.
(c) Due from Reinsurers
Amounts recoverable from reinsurers, including amounts equal to the assets
supporting insurance liabilities ceded to reinsurers and amounts due for the
reimbursement of related benefit payments, are reflected as receivables due from
reinsurers. Amounts due from reinsurers are evaluated as to their collectibility
and, if appropriate, reserves for doubtful collectibility are established
through a charge to earnings.
(d) Costs In Excess of Net Assets Acquired
The costs in excess of net assets acquired, or "goodwill," represents the
excess of amounts paid by ICH in its acquisition of subsidiaries over the net
assets of the acquired subsidiaries, which amounts have been
F-8
<PAGE> 21
INSURANCE OPERATIONS OF I.C.H. CORPORATION
ACQUIRED BY SOUTHWESTERN FINANCIAL CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
"pushed down" to the acquired subsidiaries in accordance with GAAP and are being
amortized on the straight-line basis over a 40-year period. The ICH Companies
periodically assess the recoverability of goodwill through an actuarial
projection of future earnings of the applicable insurance companies (excluding
excess cost amortization) over the remaining life of such goodwill. Such
projections include various interest rate scenarios, with anticipated levels of
new business production for only a five-year period. Prior to 1994, projected
future earnings were undiscounted. At December 31, 1994, the ICH Companies
adopted a change in accounting for assessing the recoverability of goodwill by
discounting projected future earnings of the ICH Companies using an economic
rate of return (13%) (see Note 6). At this time, the ICH Companies believe that
no significant impairment of goodwill has occurred and that no reduction of its
estimated useful life is warranted.
(e) Deferred Policy Acquisition Costs and Value of Business Acquired
Costs which vary with and are related to the acquisition of new business
have been deferred to the extent that such costs are deemed recoverable through
future revenues. These costs include commissions, certain costs of policy
issuance and underwriting and certain variable agency expenses. For traditional
life and health products, deferred costs are amortized with interest over the
premium paying period in proportion to the ratio of anticipated annual premium
revenue to the anticipated total premium revenue, using the same mortality,
morbidity and withdrawal assumptions used in computing liabilities for future
policy benefits. Deferred policy acquisition costs related to universal life,
interest-sensitive and investment products are amortized in relation to the
present value, using the assumed crediting rate, of expected gross profits on
the products, and retrospective adjustments of these amounts are made whenever
the ICH Companies revise the estimates of current or future gross profits to be
realized from a group of policies.
The value of business acquired reflects the portion of the cost to acquire
such companies that was allocated to the value of the right to receive future
cash flows from insurance contracts existing at the dates of their acquisitions.
Such value represents the actuarially determined present value of the future
cash flows from the acquired policies, based on projections of future premium
collection, mortality, morbidity, surrenders, operating expenses, investment
yields, and other factors. The account is amortized with interest over the
estimated remaining life of the acquired policies.
Recoverability of deferred policy acquisition costs and the value of
business acquired is evaluated annually by comparing the current estimate of
discounted expected future cash flows to the unamortized asset balance by line
of insurance business. If such current estimate indicates that the existing
insurance liabilities, together with the present value of future cash flows from
the business, will not be sufficient to recover the unamortized asset balance,
the difference is charged to expense. Amortization is adjusted in future years
to reflect the revised estimate of future profits.
Anticipated returns, including realized and unrealized gains and losses,
from the investment of policyholder balances are considered in determining the
amortization of deferred policy acquisition costs. When fixed maturities are
stated at their fair value, an adjustment is made to deferred policy acquisition
costs and unearned revenue reserves equal to the changes in amortization that
would have been recorded if those fixed maturities had been sold at their fair
value and the proceeds reinvested at current yields. Furthermore, if future
yields expected to be earned on fixed maturities decline, it may be necessary to
increase certain insurance liabilities. Adjustments to such liabilities are
required when their balances, in addition to future net cash flows including
investment income, are insufficient to cover future benefits and expenses.
(f) Future Policy Benefits and Other Policy Liabilities
The liability for future policy benefits of long duration contracts has
been computed by the net level premium method based on estimated future
investment yield, mortality, morbidity and withdrawal experience.
F-9
<PAGE> 22
INSURANCE OPERATIONS OF I.C.H. CORPORATION
ACQUIRED BY SOUTHWESTERN FINANCIAL CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Reserve interest assumptions are graded and range from 6% to 10%. Mortality,
morbidity and withdrawal assumptions reflect the experience of the ICH Companies
modified as necessary to reflect anticipated trends and to include provisions
for possible unfavorable deviations. The assumptions vary by plan, year of issue
and duration. The future policy benefit reserves include a provision for
policyholder dividends based upon dividend scales assumed at the date of
purchase of acquired companies or as presently contemplated.
Policy and contract claims, which are included in future policy benefits
and other policy liabilities, include provisions for reported claims in process
of settlement, valued in accordance with the terms of the related policies and
contracts, as well as provisions for claims incurred and unreported based on
prior experience of the ICH Companies.
While management believes the estimated amounts included in financial
statements for reserves and claims are adequate, such estimates may be more or
less that the amounts ultimately paid when the claims are settled.
(g) Universal Life and Investment Contract Liabilities
Benefit reserves for universal life, interest-sensitive and investment
products are determined following the retrospective deposit method and consist
principally of policy account values before any surrender charges, plus certain
deferred policy fees which are amortized using the same assumptions and factors
used to amortize deferred policy acquisition costs.
(h) Income Taxes
Deferred income taxes are recorded to reflect the tax consequences on
future years of differences between the tax bases of assets and liabilities and
their financial reporting amounts at each year-end. The excess of cost over net
assets is reduced for the tax benefits obtained from the utilization of an
acquired company's tax deductions.
(i) Recognition of Premium Revenue and Related Expenses
Premium revenue for traditional life insurance products is reported as
earned when due. Accident and health premiums are earned over the period for
which premiums are paid. Benefits and expenses are associated with earned
premiums so as to result in recognition of profits over the premium paying
period. This association is accomplished by means of a provision for future
policy benefit reserves and the amortization of deferred policy acquisition
costs.
Revenues for interest sensitive products such as universal life and annuity
contracts represent charges assessed against the policyholders' account balance
for the cost of insurance, surrenders and policy administration. Benefits
charged to expenses include benefit claims incurred during the period in excess
of policy account balances and interest credited to policy account balances.
(j) Fair Values of Financial Instruments
The following methods and assumptions were used by the ICH Companies in
estimating their fair value disclosures for financial instruments:
Cash and Short-Term Investments: The carrying amounts reported in the
balance sheet for these instruments approximate their fair values.
Investment Securities: Fair values for fixed maturity securities
(including mandatorily redeemable preferred stocks) are based on quoted
market prices, where available. For fixed maturity securities not actively
traded, fair values are estimated using values obtained from independent
pricing services or are
F-10
<PAGE> 23
INSURANCE OPERATIONS OF I.C.H. CORPORATION
ACQUIRED BY SOUTHWESTERN FINANCIAL CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
estimated based on expected future cash flows using a current market rate
applicable to the yield, credit quality, and maturity of the investments.
The fair values for equity securities are based on quoted market prices
(see Note 4).
Mortgage and Collateral Loans: The fair values for mortgage and
collateral loans are estimated using discounted cash flow analyses, based
on interest rates currently being offered for similar loans to borrowers
with similar credit ratings. Loans with similar characteristics are
aggregated for purposes of the calculations (see Note 4).
Policy Loans: Policy loans have no stated maturities and are usually
repaid by reductions to benefits and surrenders. Because of the numerous
assumptions which would have to be made to estimate fair value, the ICH
Companies believe that such information would not be meaningful.
Investments in Limited Partnerships: Fair values for the ICH
Companies' investments in limited partnerships are based on the estimated
fair values of the partnerships assets and liabilities, assuming a
liquidation of the partnerships and distribution of proceeds to the
partners (see Note 5).
Off-Balance-Sheet Instruments: Fair values for the ICH Companies'
off-balance-sheet interest rate swaps are based on formulas using current
assumptions (see Note 4).
Investment Contracts: Fair values for the ICH Companies' liabilities
under investment-type insurance contracts are estimated using discounted
cash flow calculations, based on interest rates currently being offered for
similar contracts with maturities consistent with those remaining for the
contracts being valued (see Note 7).
2. ACQUISITIONS, DISPOSITIONS AND OPERATIONS NOT ACQUIRED
(a) Sale and Acquisition of Subsidiaries.
On July 26, 1995, Southwestern Life sold to an unaffiliated party its
wholly-owned subsidiary, Bankers Life Insurance Company of New York (Bankers New
York) for $35,055,000 cash, subject to certain closing adjustments. In the
accompanying combined financial statements, Southwestern Life's investment in
Bankers New York is reflected as net assets of operations not acquired and the
operating results of Bankers New York prior to the sale are reflected as
earnings (loss) from operations not acquired.
Immediately prior to the termination of certain reinsurance agreements with
Consolidated Fidelity Life Insurance Company (CFLIC) on June 30, 1994 (see Note
3), Union Bankers utilized available cash to purchase all of the outstanding
stock of Marquette, a subsidiary of CFLIC, for $8,215,000. The purchase price
was based on the fair value of Marquette's underlying net assets, consisting
primarily of cash and U.S. Treasury obligations, adjusted for the value of
Marquette's various state licenses, as determined by an independent actuarial
firm. Marquette's results of operations have been included in the ICH Companies'
combined results of operations for periods subsequent to June 30, 1994.
On November 9, 1992, Southwestern Life sold its wholly-owned subsidiary,
Bankers Life and Casualty Company (Bankers), and Bankers' subsidiary, Certified
Life Insurance Company (Certified Life), to an affiliate of Conseco, Inc.
(Conseco), an unrelated third party, for $600 million cash, subject to final
adjustment. Southwestern Life and Constitution provided financing for the
transaction with Conseco totaling $94.3 million and, in return, retained an
approximate 29.0% interest in Bankers. The financing consisted of a $16.7
million common equity interest in Bankers Life Holding Corporation (BLHC), the
Conseco entity formed for the purpose of making the acquisition, and the
purchase of $34.7 million of BLHC 11% Junior Subordinated Debentures due 2003
and $42.9 million of a BLHC preferred stock yielding an 11% annual return. In
addition, Conseco Capital Partners, L.P. (CCP) acquired a 52.6% interest in
BLHC, and Constitution made an additional $9.6 million investment to acquire a
19.3% ownership interest in CCP. As a
F-11
<PAGE> 24
INSURANCE OPERATIONS OF I.C.H. CORPORATION
ACQUIRED BY SOUTHWESTERN FINANCIAL CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
result of the 29.0% interest in BLHC and the indirect investment through CCP,
the ICH Companies retained a residual interest in Bankers totaling approximately
39.2%. Subsequent to October 31, 1992, the effective date of the sale for
financial reporting purposes, through the date of the transfer of the residual
interest in Bankers to ICH in February and March 1993 (see Note 3), the ICH
Companies reflected their proportionate share of the operating results of CCP
and BLHC based on the equity method.
The sale of Bankers was subject to Bankers having a specified level of
adjusted capital and surplus as of October 31, 1992. A final determination as to
the level of such adjusted capital and surplus was mutually agreed upon by the
buyer and Southwestern Life, and on June 30, 1994, Southwestern Life returned
$2.5 million of the proceeds it had received from the sale.
(b) Operations Not Acquired in SWF Acquisition.
Southwestern Life has sold or transferred by dividend certain subsidiaries,
which are reflected in these combined financial statements similar to
discontinued operations. A condensed unaudited combined balance sheet of Bankers
New York which has been reflected similar to discontinued operations as of
December 31, 1994 is as follows (in thousands):
<TABLE>
<S> <C>
Investments................................................ $179,302
Other assets............................................... 46,774
--------
Total assets..................................... $226,076
========
Policy liabilities......................................... $197,588
Other liabilities.......................................... 2,526
--------
Total liabilities................................ 200,114
Business equity............................................ 25,962
--------
$226,076
========
</TABLE>
Unaudited condensed combined statements of operations of subsidiaries of
the ICH Companies reflected similar to discontinued operations are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1995 YEAR ENDED DECEMBER 31,
TO DECEMBER 14, -----------------------
1995 1994 1993
--------------- --------- ---------
<S> <C> <C> <C>
Premiums and other income....................... $ 21,291 $ 35,037 $ 76,949
Realized investment gains (losses).............. 283 (5,148) (3,958)
Benefits, costs and expenses.................... (20,362) (30,822) (70,096)
Income taxes.................................... 1,147 (1,590) (1,238)
Cumulative effect of accounting changes......... -- -- (1,212)
--------- -------- --------
Net earnings (loss)................... $ 2,359 $ (2,523) $ 445
========= ======== ========
</TABLE>
The 1995 results of operations include the results of operations for
Bankers New York for the six months ended June 30, 1995. The results of
operations for 1994 include only Bankers New York. Included in the 1993 results
of operations were Bankers New York for the full year and Bankers Multiple Line
Insurance Company (Bankers Multiple Line) and Southeast Title and Insurance
Company (Southeast) through September 30, 1993, the date of the reorganization
discussed below.
Cash dividends received from subsidiaries reported similar to discontinued
operations were $2,400,000 in 1994 and $5,900,000 in 1993.
F-12
<PAGE> 25
INSURANCE OPERATIONS OF I.C.H. CORPORATION
ACQUIRED BY SOUTHWESTERN FINANCIAL CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(c) Reorganization.
Prior to the reorganization of ICH's insurance holding company system in
September 1993, Southwestern Life was held by ICH indirectly through Modern
American Life Insurance Company (Modern American), and Union Bankers, Bankers
Multiple Line, Bankers New York, Southeast, and Constitution were held directly
by Southwestern Life. The reorganization involved a series of transactions
including the payment of dividends and the execution of a new reinsurance
agreement between Modern American and Southwestern Life. In addition,
Southwestern Life acquired Philadelphia American Life Insurance Company
(Philadelphia American), an indirect wholly-owned subsidiary of ICH, by virtue
of its receipt of a dividend from Constitution of the stock of Philadelphia
American then held by Constitution. Southwestern Life then contributed the stock
of Union Bankers, Bankers Multiple Line, Philadelphia American and Southeast to
Care Financial Corporation (CFC), a subsidiary of ICH. In the accompanying
combined financial statements, Southwestern Life's investment in the operating
results of Southeast and Bankers Multiple Line are reflected as earnings (loss)
from operations not acquired for the periods they were owned by Southwestern
Life. The contribution of the stock of Southeast, Philadelphia American and
Bankers Multiple Line to CFC is reflected as a deemed dividend of $74,530,000.
The dividend of the common stock of Union Bankers has been eliminated in the
accompanying combined financial statements.
3. RELATED PARTY TRANSACTIONS
On June 15, 1993, ICH, ICH's then-controlling shareholder, Consolidated
National Corporation (CNC), and CNC's subsidiary, CFLIC, entered into an
agreement (the 1993 Agreement) under which (i) ICH was authorized, and undertook
the obligation, to negotiate the termination of reinsurance agreements pursuant
to which CFLIC reinsured certain annuity business written by Southwestern Life,
and (ii) ICH transferred assets, consisting of a limited partnership interest at
market value (that was subsequently liquidated) and 83% of the outstanding
common stock of I.C.H. Funding, to CFLIC to acquire preferred stock of CFLIC.
The reinsurance agreements had been entered into in 1990 in conjunction with
ICH's sale of Marquette to CNC and its stockholders. Under the reinsurance
agreements, Employers Reassurance Corporation (ERC), an independent third party
insurer, retroceded to CFLIC certain annuity business which was reinsured with
ERC by Southwestern Life.
On June 30, 1994, the CFLIC reinsurance agreement was terminated, and the
business reinsured thereunder was recaptured, effective as of April 1, 1994.
Immediately prior to the termination of the CFLIC reinsurance agreements, Union
Bankers utilized available cash to purchase all of the outstanding stock of
Marquette, a subsidiary of CFLIC, for $8,215,000 (see Note 2). Upon termination
of the CFLIC reinsurance agreement relating to the business written by
Southwestern Life, CFLIC transferred cash and invested assets to ERC with a fair
value equal to the reserve liabilities being recaptured, net of the ceding fees
payable.
In conjunction with the termination of the CFLIC reinsurance agreement
relating to the business written by Southwestern Life, annuity reserve
liabilities totaling $323,305,000 were assumed by ERC and invested assets with a
fair value of $289,414,000 were transferred by CFLIC to ERC. The difference
between the reserve liabilities assumed by ERC and the assets transferred from
CFLIC, totaling $33,891,000, represented the aggregate ceding fee paid to CFLIC
to effect the termination. Immediately thereafter, Southwestern Life recaptured
$107,163,000 of the reserve liabilities from ERC and received invested assets
from ERC totaling $93,942,000. The assets consisted of cash, short-term
investments and marketable fixed maturity investments totaling $25,455,000,
CFLIC's investment in ICH Funding and certain pass-through certificates issued
by a special purpose trust with an estimated fair value totaling $12,528,000,
collateral loans due from James M. Fail and CFSB Corporation totaling
$50,640,000, and other assets, principally mortgage loans, totaling $5,319,000.
The difference between the reserve liabilities recaptured by Southwestern Life
and the assets transferred from ERC, totaling $13,221,000, represented a ceding
fee paid by Southwestern Life, and reduced
F-13
<PAGE> 26
INSURANCE OPERATIONS OF I.C.H. CORPORATION
ACQUIRED BY SOUTHWESTERN FINANCIAL CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
ERC's net ceding fees incurred to effect the CFLIC reinsurance termination to
$20,670,000. The reinsurance agreement between Southwestern Life and ERC was
amended to provide that ERC will be permitted to recover the net ceding fees
incurred out of the future profits on the portion of Southwestern Life's annuity
business it retained, together with interest at 2% per annum on the unamortized
balance of such ceding fees. For financial reporting purposes, the reinsurance
arrangement between Southwestern Life and ERC has been reflected as a financing
arrangement and, accordingly, is not reflected in the accompanying combined
financial statements except for the interest paid to ERC.
The amount of the ceding fees paid to CFLIC in connection with the
recapture was determined by management of Southwestern Life utilizing the
methodology developed by an independent actuarial firm, with appropriate
adjustments in assumptions to reflect changes in market interest rates and other
factors.
Experience refunds received from CFLIC under the Southwestern Life
reinsurance arrangement totaled $4,851,000 for the year ended December 31, 1993.
An experience refund was not received for the three month period through March
31, 1994, the effective date of the recapture, because the business reinsured by
Southwestern Life was not profitable that quarter due principally to losses
incurred on the sales of certain high yield securities and lower reinvestment
yields.
The ICH Companies recognized net gains of $12,813,000 during 1994, net of
tax effects, related to transactions involving CFLIC, which are reflected as
deemed contributions in the combined financial statements.
Southwestern Life, Constitution, Union Bankers and Marquette were parties
to a management and service agreement with FMI. FMI provided substantially all
administrative, management, investment, personnel, data processing, facilities
and certain other services for ICH, its subsidiaries and affiliates and certain
other unrelated parties. Under the management and service agreement with FMI,
the ICH Companies paid fees for personnel, data processing and other services
equal to the cost of such services to FMI and a percentage markup. The following
is the amount of fees incurred in accordance with the agreement (in thousands):
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED
JANUARY 1, 1995 DECEMBER 31,
TO DECEMBER 14, --------------------
1995 1994 1993
--------------- ------- -------
<S> <C> <C> <C>
Southwestern Life.............................. $20,212 $21,823 $34,768
Union Bankers.................................. 18,256 19,141 22,435
Constitution................................... 2,087 2,287 3,400
Marquette...................................... 325 -- --
</TABLE>
With Southwestern Life's sale of Bankers in November 1992, services related
to administering and reporting of Constitution's individual life and annuity
blocks were transferred to Bankers New York. Fees associated with this
administration totaled $550,000 for the period from January 1, 1995 to December
14, 1995, $766,000 in 1994 and $1,013,000 in 1993.
Southwestern Life had a surplus debenture payable to ICH which was repaid
in 1993 as part of the reorganization (see Note 2). Interest paid in 1993
totaled $1,516,000.
On February 3, 1993, ICH purchased 28,964 shares of BLHC common stock from
the ICH Companies at their $24,318,000 cost basis and on March 15, 1993, ICH
purchased Constitution's investment in CCP at its $9,640,000 cost basis plus
interest from date of purchase. The ICH Companies' carrying values of these
investments totaled a negative $31,897,000 (see Note 5). The difference between
the amount received and the
F-14
<PAGE> 27
INSURANCE OPERATIONS OF I.C.H. CORPORATION
ACQUIRED BY SOUTHWESTERN FINANCIAL CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
carrying value of such investments totaling $53,219,000, net of tax effects, has
been reflected in the accompanying financial statements as a deemed contribution
from ICH to Southwestern Life.
See Note 9 for a description of reinsurance agreements with affiliates.
At December 31, 1994, Constitution held $21.5 million principal amount of
ICH 11 1/4% Senior Subordinated Notes due 1996 (ICH Notes) with a carrying value
of $18,287,000, and a fair value of $17,845,000. Interest income on the ICH
Notes totaled $1,008,000 for the period from January 1, 1995 to December 14,
1995, $3,613,000 in 1994, and $1,988,000 in 1993. The ICH Notes were distributed
as a dividend to ICH in conjunction with the sale of the ICH Companies in
December 1995 at their estimated fair value of $13,330,000. The loss recognized
on the dividend of $6,373,000 is reflected as a deemed dividend.
4. INVESTMENTS
Investment income by type of investment is as follows (in thousands):
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1995 YEAR ENDED DECEMBER 31,
TO DECEMBER 14, ------------------------
1995 1994 1993
--------------- -------- ---------
<S> <C> <C> <C>
Gross investment income (loss):
Fixed maturities............................... $ 93,706 $104,214 $ 94,260
Equity securities.............................. 3,423 907 3,286
Financial options and futures(a)............... 50,254 (8,744) 15,515
Mortgage loans................................. 11,223 10,942 15,284
Policy loans................................... 8,231 8,668 8,552
Short-term investments......................... 9,786 8,098 7,320
Collateral loans............................... 5,235 5,373 2,843
Real estate.................................... 3,805 4,450 4,533
Investments held in trust under reinsurance
treaty(b)................................... 13,343 11,026 --
Other.......................................... 2,525 3,273 3,972
--------- -------- --------
201,531 148,207 155,565
Less: Investment expenses...................... 9,385 11,057 12,451
--------- -------- --------
Net investment income.................. $ 192,146 $137,150 $143,114
========= ======== ========
</TABLE>
- ---------------
(a) Financial options and futures were utilized in connection with certain
separate account guaranteed investment contracts which were terminated
during 1995. Financial options and futures are included in other invested
assets and had a carrying value and fair value of $116,000 as of December
31, 1994.
(b) Investments held in trust by a reinsurer with carrying values of
$133,742,000 and $178,240,000 as of December 14, 1995 and December 31, 1994,
respectively, are included in amounts due from reinsurers.
F-15
<PAGE> 28
INSURANCE OPERATIONS OF I.C.H. CORPORATION
ACQUIRED BY SOUTHWESTERN FINANCIAL CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Following is an analysis of realized gains (losses) on investments (in
thousands):
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1995 YEAR ENDED DECEMBER 31,
TO DECEMBER 14, -----------------------
1995 1994 1993
--------------- --------- ---------
<S> <C> <C> <C>
Fixed maturities................................ $ 1,823 $ 2,707 $ 4,721
Collateralized mortgage obligations............. (3,448) (76,345) (7,738)
Equity securities............................... 543 (722) 37,521
Mortgage loans.................................. (492) (3,105) --
Investment in limited partnership............... 952 -- --
Investment real estate.......................... 49 1,892 (2,116)
Other........................................... 12 2,508 (5,564)
------- -------- -------
$ (561) $(73,065) $26,824
======= ======== =======
</TABLE>
The following table reflects investment writedowns which are included in
realized investment gains or losses for the period from January 1, 1995 to
December 14, 1995 and the years ended December 31, 1994 and 1993 (in thousands):
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1995 YEAR ENDED DECEMBER 31,
TO DECEMBER 14, -----------------------
1995 1994 1993
---------------- -------- --------
<S> <C> <C> <C>
Fixed maturities............................ $ -- $ -- $4,350
Collateralized mortgage obligations......... 3,448 76,345 --
Equity securities........................... -- 430 109
Mortgage loans.............................. -- 3,000 --
Investment real estate...................... -- 571 3,000
------ ------- ------
Total writedowns.................. $3,448 $80,346 $7,459
====== ======= ======
</TABLE>
Fixed maturities writedowns in 1993 were related to credit deterioration of
noninvestment-grade securities. CMO writedowns in 1995 included $3,448,000 of
other than temporary writedowns of derivative CMO investments in the SIST
Residual. CMO writedowns in 1994 included $69,775,000 of other than temporary
writedowns of derivative CMO investments in Fund America Investors Corporation
II (Fund America Investment) and the Secured Investors Secured Trust 1993-1
(SIST Residual), $2,570,000 of writedowns on investments expected to be
liquidated in 1995, and $4,000,000 of other than temporary writedowns on other
CMO investments. Writedowns of equity securities in 1994 and 1993 primarily
relate to non-redeemable preferred stocks. The mortgage loan writedown in 1994
reflects the provision of reserve for mortgage loan losses. Investment real
estate writedowns reflect the general deterioration in real estate markets
during 1994 and 1993.
In 1993, the ICH Companies adopted the provisions of SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," and
classified their fixed maturities into two categories, available for sale and
held to maturity. SFAS No. 115 also established criteria for the recognition of
a permanent impairment in the carrying value of debt and equity securities.
During 1993, the ICH Companies reflected a charge for the cumulative effect of
writedowns of certain mortgage-backed securities required under the provisions
of SFAS No. 115 totaling $6,198,000. The cumulative charge was reflected net of
$2,169,000 in related income tax effects.
During 1994, the ICH Companies continued to evaluate their Fund America
Investment and the SIST Residual in accordance with SFAS No. 115 and Emerging
Issues Task Force (EITF) Issue No. 93-18,
F-16
<PAGE> 29
INSURANCE OPERATIONS OF I.C.H. CORPORATION
ACQUIRED BY SOUTHWESTERN FINANCIAL CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
"Impairment Recognition for a Purchased Investment in a Collateralized Mortgage
Obligation Investment or in a Mortgage-Backed Interest Only Certificate." Due
primarily to the rising interest rate environment experienced in 1994 and its
effect on the projected future cash flows of the Fund America Investment and the
SIST Residual, realized investment losses were triggered under the provisions of
EITF No. 93-18 on two occasions during 1994 and on one occasion during the
period from January 1, 1995 to December 14, 1995.
The amortized cost of investments and fixed maturities, the cost of equity
securities and the estimated values of such investments at December 14, 1995 and
December 31, 1994 by categories of securities are as follows (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
December 14, 1995:
Available for sale:
United States Government, government agencies
and authorities............................. $ 38,412 $ 1,010 $ (50) $ 39,372
States, municipalities and political
subdivisions................................ 14,332 1,483 -- 15,815
Foreign government securities................. 16,764 1,754 -- 18,518
Public utilities.............................. 95,251 2,967 (783) 97,435
Mortgage-backed securities.................... 469,824 18,781 (8,275) 480,330
All other corporate........................... 485,514 26,747 (2,348) 509,913
---------- -------- --------- ----------
Subtotal, available for sale fixed
maturities............................. 1,120,097 52,742 (11,456) 1,161,383
Held to maturity:
Mortgage-backed securities.................... 14,006 -- (590) 13,416
---------- -------- --------- ----------
Subtotal, all fixed maturities........... 1,134,103 52,742 (12,046) 1,174,799
---------- -------- --------- ----------
Non-redeemable preferred stocks.................. 1,374 327 (5) 1,696
Common stocks.................................... 275 352 (150) 477
---------- -------- --------- ----------
Subtotal, equity securities available for
sale................................... 1,649 679 (155) 2,173
---------- -------- --------- ----------
Total fixed maturities and equity
securities ............................ $1,135,752 $ 53,421 $ (12,201) $1,176,972
========== ======== ========= ==========
December 31, 1994:
Available for sale:
United States Government, government agencies
and authorities............................. $ 45,153 $ 15 $ (1,330) $ 43,838
States, municipalities and political
subdivisions................................ 13,321 97 (266) 13,152
Foreign government securities................. 16,852 26 (1,351) 15,527
Public utilities.............................. 117,026 41 (14,937) 102,130
Mortgage-backed securities.................... 630,266 1,631 (35,349) 596,548
All other corporate........................... 525,084 734 (29,502) 496,316
---------- -------- --------- ----------
Subtotal, available for sale fixed
maturities............................. 1,347,702 2,544 (82,735) 1,267,511
Held to maturity:
Mortgage-backed securities.................... 15,915 -- (2,003) 13,912
Affiliated.................................... 18,287 -- (442) 17,845
---------- -------- --------- ----------
Subtotal, all fixed maturities........... 1,381,904 2,544 (85,180) 1,299,268
---------- -------- --------- ----------
Non-redeemable preferred stocks.................. 8,425 150 -- 8,575
Common stocks.................................... 1,078 552 (67) 1,563
---------- -------- --------- ----------
Subtotal, equity securities available for
sale................................... 9,503 702 (67) 10,138
---------- -------- --------- ----------
Total fixed maturities and equity
securities.................................. $1,391,407 $ 3,246 $ (85,247) $1,309,406
========== ======== ========= ==========
</TABLE>
F-17
<PAGE> 30
INSURANCE OPERATIONS OF I.C.H. CORPORATION
ACQUIRED BY SOUTHWESTERN FINANCIAL CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The amortized cost and estimated fair value of fixed maturities at December
14, 1995, by contractual maturity, is shown below (in thousands):
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
COST VALUE
---------- ----------
<S> <C> <C>
Available for sale:
Due in one year or less................................... $ 47,272 $ 45,906
Due after one year through five years..................... 123,862 127,408
Due after five years through ten years.................... 247,524 262,759
Due after ten years....................................... 231,615 244,980
---------- ----------
650,273 681,053
Mortgage-backed securities................................ 469,824 480,330
---------- ----------
Subtotal, available for sale.............................. 1,120,097 1,161,383
Held to maturity:
Mortgage-backed securities................................ 14,006 13,416
---------- ----------
$1,134,103 $1,174,799
========== ==========
</TABLE>
Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
Excluding scheduled maturities and sales related to reinsurance
transactions, proceeds from sales of investments in debt securities during the
period from January 1, 1995 to December 14, 1995 and for 1994 and 1993 and the
related gross gains and gross losses realized on such sales were as follows (in
thousands):
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1995 YEAR ENDED DECEMBER 31,
TO DECEMBER 14, -----------------------
1995 1994 1993
--------------- --------- ----------
<S> <C> <C> <C>
Proceeds from sales.............................. $ 281,623 $396,491 $508,057
========= ======== ========
Gross gains...................................... $ 5,224 $ 5,822 $ 20,271
========= ======== ========
Gross losses..................................... $ (6,849) $ (3,115) $(15,771)
========= ======== ========
</TABLE>
F-18
<PAGE> 31
INSURANCE OPERATIONS OF I.C.H. CORPORATION
ACQUIRED BY SOUTHWESTERN FINANCIAL CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Following are changes in unrealized appreciation (depreciation) on
investments (in thousands):
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1995 YEAR ENDED DECEMBER 31,
TO DECEMBER 14, -----------------------
1995 1994 1993
--------------- ---------- ---------
<S> <C> <C> <C>
Investments carried at amortized cost:
Fixed maturities held to maturity............. $ 1,413 $ (49) $ 8,744
========= ========= ========
Investments carried at fair value:
Available for sale fixed maturities........... $ 121,477 $(103,736) $ 24,978
Equity securities............................. (111) (2,098) (22,746)
Other......................................... 633 539 (159)
--------- --------- --------
121,999 (105,295) 2,073
Less effect on other balance sheet accounts:
Deferred policy acquisition costs............. (19,083) 24,221 (11,460)
Unearned revenue reserves..................... 8,030 (8,102) 2,732
Deferred income taxes......................... (38,849) 33,084 2,332
Equity investees.............................. -- -- (861)
Equity in unrealized gains (losses) of
operations not acquired.................... 6,992 (10,072) 2,848
Minority interest in unrealized gains
(losses)................................... (573) 467 --
--------- --------- --------
Change in unrealized investment gains and
losses........................................ $ 78,516 $ (65,697) $ (2,336)
========= ========= ========
</TABLE>
The carrying values of non-income producing nonaffiliated invested assets
for the period from January 1, 1995 to December 14, 1995 were as follows (in
thousands):
<TABLE>
<CAPTION>
1995
-------
<S> <C>
Fixed maturities........................................... $ 1,699
Equity securities.......................................... 496
Investment real estate..................................... 13,992
Mortgages.................................................. 2,028
Other invested assets...................................... 2,914
-------
$21,129
=======
</TABLE>
Other than the investment in the James M. Fail and CFSB Corp.
collateralized notes totaling $41,308,000 and $49,465,000 at December 14, 1995
and December 31, 1994, respectively, there are no other investments in one
issuer which exceeded 10% of business equity at December 14, 1995 or December
31, 1994.
At December 14, 1995 and December 31, 1994, the ICH Companies held unrated
or noninvestment-grade fixed maturities with carrying values of $67,146,000 and
$98,997,000, respectively, and aggregate fair values of $67,075,000 and
$98,737,000, respectively. These holdings amounted to 6% and 8% of the Company's
fixed maturity investments and 4% and 5% of total cash and invested assets at
December 14, 1995 and December 31, 1994, respectively. The holdings of
noninvestment-grade securities are widely diversified and include securities of
approximately 40 issuers.
At December 14, 1995 and December 31, 1994, the ICH Companies held residual
interest mortgage-backed securities other than the Fund America Investment and
the SIST Residual with carrying values of $6,561,000 and $7,904,000,
respectively, and fair values of $4,536,000 and $4,223,000, respectively. The
F-19
<PAGE> 32
INSURANCE OPERATIONS OF I.C.H. CORPORATION
ACQUIRED BY SOUTHWESTERN FINANCIAL CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
effective annual yield on such investments based on their carrying value
approximated 4.5% at December 14, 1995.
At December 14, 1995 and December 31, 1994, the ICH Companies held mortgage
loans principally involving commercial real estate with carrying values of
$104,119,000 and $123,048,000, respectively, and estimated fair values of
$103,792,000, and $115,375,000, respectively. Approximately 66% of such
mortgages involved property located in Texas, consisting of first mortgage liens
on completed income-producing properties. No individual mortgage exceeds $8
million.
The ICH Companies are required to maintain certain amounts of assets on
deposit with state regulatory authorities. Such assets had an aggregate carrying
value of $146,888,000 and $152,966,000 at December 14, 1995 and December 31,
1994, respectively.
Constitution entered into interest rate swap arrangements to convert the
interest rate characteristics of certain investments to match those of related
insurance liabilities. The agreements expire in 1996 and 1997 and exchange
fixed-rate payments ranging from 6.0% to 8.44% for three month LIBOR-based
interest payments on notional amounts of $6.2 million and $23.3 million at
December 14, 1995 and December 31, 1994, respectively. The interest rate
differential to be received or paid is recognized over the lives of the
agreements as an adjustment to interest expense. Constitution is exposed to
credit risk in the event of default by counterparties to the extent of any
amounts that have been recorded in the balance sheet and market risk as a result
of potential future increases in LIBOR. The fair values of interest rate swap
arrangements at December 14, 1995 and December 31, 1994, approximated $31,500
and $336,000, respectively.
5. INVESTMENTS IN EQUITY INVESTEES AND LIMITED PARTNERSHIPS
Following is an analysis of the ICH Companies' investments in limited
partnerships (in thousands):
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1995 YEAR ENDED DECEMBER 31,
TO DECEMBER 14, -----------------------
1995 1994 1993
--------------- --------- ---------
<S> <C> <C> <C>
Balance, beginning of period....................... $25,005 $28,601 $20,332
Contributions and capitalized costs................ -- 321 4,947
Equity in operating earnings (losses).............. 5,802 3,974 5,893
Sale of partnership investment..................... (804) -- --
Distribution to ICH of partnership interests not
acquired in SWF acquisition...................... (3,100) -- --
Distributions of earnings.......................... -- -- (88)
Other distributions................................ -- (7,891) (2,483)
------- ------- -------
Balance, end of period............................. $26,903 $25,005 $28,601
======= ======= =======
</TABLE>
Included in limited partnerships at December 14, 1995, was a $26,903,000
investment, representing a 49% limited partnership interest, in a partnership
formed to acquire through auction for resale certain mortgage loans and real
estate formerly held by failed savings and loan associations. During 1994, this
limited partnership distributed $7,891,000 of mortgages to Southwestern Life.
At December 31, 1992, the ICH Companies owned a 39.2% indirect equity
interest in Bankers, consisting of a 29.0% equity interest in BLHC and 10.2%
equity interest through its limited partnership investment in CCP. In addition,
the ICH Companies owned $34.7 million principal amount of BLHC 11% Junior
Subordinated Debentures due 2003 and $42.9 million of a BLHC 11% preferred
stock. The 1992 sale of Bankers was accounted for as a "step transaction" in
accordance with GAAP. Accordingly, gain recognition
F-20
<PAGE> 33
INSURANCE OPERATIONS OF I.C.H. CORPORATION
ACQUIRED BY SOUTHWESTERN FINANCIAL CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
was limited to the 60.1% interest deemed to have been sold. The excess of the
sales price over Southwestern Life's basis in Bankers on the 39.9% portion of
the investment deemed to have been retained by Southwestern Life (excess of
sales price over basis in retained interest) was reflected as a reduction in the
carrying value of the ICH Companies investments in BLHC and CCP. In February and
March 1993, the ownership interests in BLHC and CCP were purchased by ICH (see
Note 3).
The results of operations of BLHC for the 1993 period prior to their
purchase by ICH are as follows (in thousands):
<TABLE>
<CAPTION>
1993
--------
<S> <C>
Results of operations (unaudited):
Revenues................................................................ $354,700
Earnings from operations before effect of accounting change............. 29,800
Extraordinary loss from early debt retirement........................... (4,800)
Net earnings attributable to common stock............................... 20,500
</TABLE>
Following is an analysis of the ICH Companies' equity investments in BLHC
and CCP (in thousands):
<TABLE>
<CAPTION>
1993
--------
<S> <C>
Equity investments, beginning of year..................................... $(36,303)
Equity in earnings of BLHC and CCP, including amortization of portion of
excess of sales price over basis........................................ 5,267
Equity in (elimination of equity in) unrealized investment gains.......... (861)
Elimination of negative carrying value upon sale to ICH................... 31,897
--------
Equity investments, end of year........................................... $ --
========
</TABLE>
Following is a summary of the equity in earnings of equity investees and
limited partnerships (in thousands):
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED
JANUARY 1, 1995 DECEMBER 31,
TO DECEMBER 14, ------------------
1995 1994 1993
--------------- ------ -------
<S> <C> <C> <C>
Operating earnings (losses):
BLHC...................................................... $ 5,267
Limited partnerships...................................... $ 5,802 $3,974 5,893
------- ------ ------
Equity in operating earnings (losses)....................... $ 5,802 $3,974 $11,160
======= ====== ======
Distributed earnings received............................... $ -- $ -- $ 88
======= ====== ======
</TABLE>
6. ACCOUNTING FOR COSTS IN EXCESS OF NET ASSETS ACQUIRED (GOODWILL)
All of the ICH Companies' unamortized goodwill reflected in the combined
balance sheets is attributable to Southwestern Life. Historically, Southwestern
Life periodically assessed the recoverability of its goodwill through an
actuarial projection of its undiscounted future earnings (excluding excess cost
amortization) over the remaining life of such goodwill. Such projections assumed
anticipated levels of new production over a succeeding five-year period.
In early 1995, management concluded that the ICH Companies' accounting
policy with respect to the recoverability of goodwill should be changed to
discount projections of future earnings using an economic rate
F-21
<PAGE> 34
INSURANCE OPERATIONS OF I.C.H. CORPORATION
ACQUIRED BY SOUTHWESTERN FINANCIAL CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
of return that would be customary for evaluating the present value of future
profits in connection with current life insurance company transactions. As a
result of this accounting change, the goodwill attributable to Southwestern Life
was reduced, as of December 31, 1994, from $288,333,000 to $77,650,000, or a
total reduction of $210,683,000. Because such a change in accounting was
determined to be inseparable from a change in an estimate, such reduction was
reflected as a charge to operating earnings, as opposed to being reflected as a
cumulative effect of a change in an accounting principle. As of December 31,
1995, the ICH Companies evaluated costs in excess of net assets acquired based
upon 1995 experience and determined that an additional reduction of $9,225,000
was warranted, which has been reflected as additional amortization in 1995.
Accumulated amortization was $302,435,000 and $290,895,000 at December 14, 1995
and December 31, 1994, respectively.
7. INSURANCE LIABILITIES
Insurance liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
MORTALITY OR INTEREST
WITHDRAWAL MORBIDITY RATE DECEMBER 14, DECEMBER 31,
ASSUMPTIONS ASSUMPTIONS ASSUMPTIONS 1995 1994
----------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Future policy benefits:
Traditional life insurance
contracts............... Company Company 6%-10% $ 363,546 $ 377,199
experience experience
Traditional annuity
products................ N/A N/A N/A 98,883 102,467
Individual accident and
health.................. Company Company 6%-10% 56,971 52,314
experience experience
Unearned premiums.......... N/A N/A N/A 33,026 28,243
Claims and benefits
payable................. N/A N/A N/A 59,370 45,875
Dividend and coupon
accumulations and
other................... N/A N/A N/A 20,447 23,023
---------- ----------
632,243 629,121
---------- ----------
Universal life and investment
contract liabilities:
Universal life and
annuities............... N/A N/A N/A 1,087,910 1,203,185
Guaranteed investment
contracts............... N/A N/A N/A 6,750 313,296
---------- ----------
1,094,660 1,516,481
---------- ----------
$1,726,903 $2,145,602
========== ==========
</TABLE>
The estimated fair value of guaranteed investment contracts (GIC)
approximated their carrying value at December 31, 1994 because it was expected
that substantially all of such contracts were to be terminated during 1995.
Remaining GICs as of December 14, 1995 are expected to be terminated during 1996
and 1997 and estimated fair values approximate their carrying values. The
estimated fair value of the liabilities for other investment contracts is
approximately equal to their carrying value at December 14, 1995 and December
31, 1994, because interest rates credited to account balances approximate
current rates paid on similar investments and are generally not guaranteed
beyond one year. The fair values of liabilities under all insurance contracts
are taken into consideration in the ICH Companies' overall management of
interest rate risk, which minimizes exposure to changing interest rates through
the matching of investment maturities with amounts due under insurance
contracts.
F-22
<PAGE> 35
INSURANCE OPERATIONS OF I.C.H. CORPORATION
ACQUIRED BY SOUTHWESTERN FINANCIAL CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Activity in the liability for claims and benefits payable for the period
from January 1, 1995 to December 14, 1995 and for the years ended December 31,
1994 and 1993 is summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Claims and benefits payable at beginning of year... $ 45,875 $ 37,689 $ 37,299
Less reinsurance recoverables...................... 173 56 --
-------- -------- --------
Net beginning balance............................ 45,702 37,633 37,299
Add incurred losses net of reinsurance:
Current year..................................... 137,489 116,691 102,845
Prior years...................................... 117 667 (4,620)
-------- -------- --------
137,606 117,358 98,225
-------- -------- --------
Deduct payments for claims, net of reinsurance:
Current year..................................... 94,407 84,819 76,306
Prior years...................................... 29,648 24,470 21,585
-------- -------- --------
124,055 109,289 97,891
-------- -------- --------
Claims and benefits payable, net of related
reinsurance recoverables at end of year.......... 59,253 45,702 37,633
Plus reinsurance recoverables...................... 117 173 56
-------- -------- --------
Balance at end of year............................. $ 59,370 $ 45,875 $ 37,689
======== ======== ========
</TABLE>
8. BUSINESS EQUITY AND RESTRICTIONS
Substantially all of the combined business equity represents net assets of
the ICH Companies that cannot be transferred to their parents in the form of
dividends, loans or advances. Generally, the net assets of the ICH Companies
available for transfer to their parents are limited to the greater of the ICH
Companies' net gain from operations during the preceding year or 10% of the ICH
Companies' net statutory surplus as of the end of the preceding year as
determined in accordance with accounting practices prescribed or permitted by
insurance regulatory authorities. Payment of dividends in excess of such amounts
would generally require approval by the regulatory authorities. At December 14,
1995, any payment of dividends by the ICH Companies would require prior
approval.
The ICH Companies prepare their statutory financial statements in
accordance with accounting practices prescribed or permitted by their respective
state insurance departments. Prescribed statutory accounting practices include
state laws, regulations, and general administrative rules, as well as a variety
of publications of the National Association of Insurance Commissioners (NAIC).
Permitted statutory accounting practices encompass all accounting practices that
are not prescribed; such practices differ from state to state, and may differ
from company to company within a state, and may change in the future.
Furthermore, the NAIC has a project to codify statutory accounting practices,
the result of which is expected to constitute the only source of "prescribed"
statutory accounting practices. Accordingly, that project will likely change to
some extent prescribed statutory accounting practices and may result in changes
to the accounting practices that insurance enterprises use to prepare their
statutory financial statements.
F-23
<PAGE> 36
INSURANCE OPERATIONS OF I.C.H. CORPORATION
ACQUIRED BY SOUTHWESTERN FINANCIAL CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
On the basis of reporting as prescribed by insurance regulatory
authorities, the combined statutory capital and surplus of the ICH Companies
after elimination of amounts attributable to investments in consolidated
insurance subsidiaries, amounted to approximately $128,729,000 and $152,253,000
and the combined asset valuation reserve amounted to $23,070,000 and $28,758,000
as of December 31, 1995 and 1994, respectively. Combined statutory net income
(loss) was $(76,673,000), ($14,623,000) and $21,577,000 for the years ended
December 31, 1995, 1994 and 1993, respectively. A reconciliation between
statutory net income (loss) to GAAP for the years ended December 31, 1995, 1994
and 1993 is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------- --------- --------
<S> <C> <C> <C>
Statutory net income (loss)......................... $(76,673) $ (14,623) $ 27,735
GAAP adjustments:
Eliminate financial reinsurance................... 44,703 27,335 20,120
Change in difference in carrying value of
investments.................................... 32,203 (71,010) 4,636
Eliminate change in IMR........................... 12,903 6,732 (12,719)
Equity in earnings of BLHC........................ -- -- 5,267
Amortization of costs in excess of net assets
acquired....................................... (11,540) (9,010) (9,010)
Change in accounting for costs in excess of net
assets
acquired....................................... -- (210,683) --
Deferred income tax (expense) benefit............. (1,847) 8,314 (7,277)
Other............................................. 2,846 (5,681) 4,399
-------- --------- --------
GAAP net earnings (loss)............................ $ 2,595 $(268,626) $ 33,151
======== ========= ========
</TABLE>
Other includes differences related to deferred policy acquisition cost and
present value of business acquired, policy benefit reserves and other items.
Included in other in 1995 is a reduction of estimated GAAP profits for the
period December 15, 1995 to December 31, 1995 of approximately $340,000.
9. REINSURANCE
The ICH Companies have set their retention limit for acceptance of risk on
life insurance policies at various levels currently up to $500,000. There are
reinsurance agreements with various companies whereby insurance in excess of the
ICH Companies' retention limits is reinsured. To the extent that reinsuring
companies become unable to meet their obligations under these agreements, the
subsidiaries remain contingently liable. Insurance in force ceded as of December
14, 1995 and December 31, 1994, under risk sharing arrangements totaled
approximately $3.0 billion and $3.4 billion, respectively.
F-24
<PAGE> 37
INSURANCE OPERATIONS OF I.C.H. CORPORATION
ACQUIRED BY SOUTHWESTERN FINANCIAL CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Reinsurance contracts do not relieve the ICH Companies from their
obligations to policyholders. Therefore, the ICH Companies are contingently
liable for recoverable unpaid claims and policyholder liabilities ceded to
reinsurers in the unlikely event that assuming reinsurers are unable to meet
their obligations. The ICH Companies evaluate the financial condition of their
reinsurers to minimize the exposure to significant losses from reinsurer
insolvencies. At December 14, 1995 and December 31, 1994, the ICH Companies have
reflected in their combined balance sheets an asset for amounts due from
reinsurers totaling $152,866,000 and $199,035,000, respectively, and have
correspondingly increased their insurance liabilities by the same amounts in
each respective year. The effect of reinsurance on policy revenue earned and the
related benefits incurred by such reinsurers for the period from January 1, 1995
to December 14, 1995 and for the years ended December 31, 1994 and 1993 (in
thousands) is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Direct policy revenues and amounts assessed against
policyholders...................................... $250,427 $254,700 $263,760
Reinsurance assumed.................................. 3,116 5,719 2,023
Reinsurance ceded.................................... (11,328) (21,770) (27,131)
-------- -------- --------
Net premiums and amounts earned...................... $242,215 $238,649 $238,652
======== ======== ========
Benefits and withdrawals ceded....................... $ 6,149 $ 9,711 $ 51,476
======== ======== ========
</TABLE>
Amounts due from reinsurers included amounts due from ERC of $138,982,000
at December 14, 1995 and $188,756,000 at December 31, 1994 (see Note 3). The
underlying assets held by ERC had carrying values of $125,907,000 and
$170,709,000 and fair values of $131,386,000 and $162,751,000 at December 14,
1995 and December 31, 1994, respectively.
Southwestern Life has ceded blocks of insurance under reinsurance treaties
with ERC to provide funds for financing and other purposes. These reinsurance
transactions, are considered "surplus relief reinsurance," and represent
financing arrangements and, in accordance with GAAP, are not reflected in the
accompanying financial statements except for the risk fees paid to ERC.
Statutory surplus provided by such treaties totaled $51.5 million at December
14, 1995 and $57.8 million at December 31, 1994. The life reinsurance treaty
with ERC was canceled effective March 31, 1996 and the effects of the recapture
were recorded by Southwestern Life in its statutory financial statements as of
December 31, 1995. Risk fees paid to reinsurers generally range from 2% to 4% of
the net amount of surplus provided.
On August 1, 1990, Constitution entered into a coinsurance agreement
whereby it ceded to Modern American substantially all of its liability in effect
(net of any prior reinsurance ceded) for all policies in force on August 1,
1990. Activity under this agreement is summarized as follows (in thousands):
<TABLE>
<CAPTION>
1993
------
<S> <C>
Premiums and other revenue ceded.............................. $3,143
Reinsurance commissions and expense allowance ceded........... 48
Benefits ceded................................................ 3,879
</TABLE>
On September 29, 1993, as part of a corporate plan of restructuring,
Constitution terminated the agreement with Modern American and recaptured
liabilities of $83,370,000. Net of the payment of a $7 million recapture fee,
net assets of $76,370,000 were transferred to Constitution. Included in these
assets were $9,165,000 par value of ICH 11.25% Senior Subordinated Notes and
100% ownership of the common stock of Philadelphia American with a book value of
$37,800,000. The Philadelphia American stock was subsequently distributed in the
form of a dividend to Southwestern Life. The net gain to Constitution from the
recapture of $313,000, net of taxes, is reflected as a deemed contribution of
capital.
F-25
<PAGE> 38
INSURANCE OPERATIONS OF I.C.H. CORPORATION
ACQUIRED BY SOUTHWESTERN FINANCIAL CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
10. COMMITMENTS, LITIGATION AND CONTINGENT LIABILITIES
Southwestern Life has a lease covering certain of its administrative office
facilities which expires November 30, 1997. Minimum rental commitments under the
lease total $7.5 million.
From time to time, assessments are levied on the ICH Companies by life and
health guaranty associations in states in which they are licensed to do
business. Such assessments are made primarily to cover the losses of
policyholders of insolvent or rehabilitated insurers. In some states, these
assessments can be partially recovered through a reduction in future premium
taxes. The ICH Companies paid assessments of $2.1 million, $2.4 million and $2.9
million for the period January 1, 1995 to December 14, 1995 and for the years
1994 and 1993, respectively. Based on information currently available, the ICH
Companies had accrued approximately $3.5 million at December 14, 1995 for future
assessments.
Various lawsuits and claims are pending against the ICH Companies. Based in
part upon the opinion of counsel as to the ultimate disposition of these
matters, management believes that the liability, if any, will not be material.
11. FEDERAL INCOME TAXES
Prior to their sale in December 1995, the ICH Companies, other than
Marquette and ICH Funding, were included in a consolidated income tax return
with ICH and substantially all of ICH's other subsidiaries. The Consolidated
Return Group was subject to a Tax Allocation Agreement under which each member's
tax liability equals or approximates separate return calculations with current
credit for net losses utilized by other members of this group. During 1994, ICH
paid taxes owed by ICH Funding of $424,000, which has been reflected as a deemed
contribution.
F-26
<PAGE> 39
INSURANCE OPERATIONS OF I.C.H. CORPORATION
ACQUIRED BY SOUTHWESTERN FINANCIAL CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Pursuant to the December 14, 1995 Stock Acquisition Agreement between SWF
and ICH, the sale of Southwestern Life was treated as a deemed sale of assets
subject to an election under Section 338(h)(10) of the Internal Revenue Code.
Further, the benefits of the sale were to be retained by ICH as the seller. As a
result, Southwestern Life's net deferred tax asset of $12.8 million is reflected
as a deemed dividend to ICH. The ICH Companies' deferred federal income tax
asset at December 14, 1995 (excluding Southwestern Life) and December 31, 1994,
is comprised of the tax benefit (cost) associated with the following items based
on 35% tax rates in effect (in thousands):
<TABLE>
<CAPTION>
DECEMBER 14, DECEMBER 31,
1995 1994
------------ ------------
<S> <C> <C>
Deferred tax assets:
Items subject to ordinary tax treatment:
Deferred policy acquisition costs and value of
business acquired................................... $(13,824) $(56,656)
Future policy benefits................................ 10,599 55,614
Other assets and liabilities.......................... 9,491 33,270
Net operating loss carryforwards...................... 2,264 1,887
-------- --------
8,530 34,115
-------- --------
Invested assets, subject to capital gains (loss)
treatment:
Alternative minimum tax credit carryforwards.......... 326 8,673
Unrealized capital losses............................. -- 27,730
Invested assets....................................... 9,123 7,219
-------- --------
9,449 43,622
-------- --------
Deferred income tax asset........................ 17,979 77,737
Deferred tax liabilities:
Unrealized capital gains................................. (1,936) --
Less: valuation allowance................................ (9,135) (9,389)
-------- --------
Net deferred tax asset..................................... $ 6,908 $ 68,348
======== ========
</TABLE>
The components of the provision (credit) for income taxes on operating
earnings (loss) are as follows (in thousands):
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED
JANUARY 1, 1995 DECEMBER 31,
TO DECEMBER 14, ------------------
1995 1994 1993
--------------- ------- -------
<S> <C> <C> <C>
Current tax provision.............................. $ 8,119 $ 7,272 $13,482
Deferred tax provision (credit).................... 1,847 (8,314) 7,277
------- ------- -------
Income tax provision (credit)...................... $ 9,966 $(1,042) $20,759
======= ======= =======
</TABLE>
F-27
<PAGE> 40
INSURANCE OPERATIONS OF I.C.H. CORPORATION
ACQUIRED BY SOUTHWESTERN FINANCIAL CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the income tax provisions (credits) based on the
prevailing corporate tax rate of 35% to the provisions (credits) reflected in
the consolidated financial statements is as follows (in thousands):
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1995 YEAR ENDED DECEMBER 31,
TO DECEMBER 14, -----------------------
1995 1994 1993
--------------- ---------- ---------
<S> <C> <C> <C>
Computed expected income tax provision (credit) at
statutory regular tax rate...................... $ 3,571 $(93,501) $18,958
Change in accounting for excess cost.............. -- 73,739 --
Amortization of excess cost....................... 4,039 3,154 3,154
Effect of change in income tax rate............... -- -- (745)
Reduction in (benefit from) utilization of tax
loss carryforwards.............................. -- 2,875 (2,328)
Additional tax basis gains on sales of
subsidiaries.................................... -- 1,076 --
Provision for tax settlement...................... 382 7,981 --
Increase in deferred tax asset valuation
allowance....................................... 2,955 3,969 5,420
Other............................................. (981) (335) (3,700)
------- -------- -------
Income tax provision (credit)........... $ 9,966 $ (1,042) $20,759
======= ======== =======
</TABLE>
At December 14, 1995, the ICH Companies had the following income tax
carryforwards available (in thousands):
<TABLE>
<CAPTION>
TAX EXPIRATION
PURPOSES DATES
-------- -----------
<S> <C> <C>
U.S. federal regular tax operating loss carryforwards............ $6,467 2009
U.S. federal AMT credit carryforwards against regular tax........ 361 Indefinite
</TABLE>
Management has periodically assessed the ability of the ICH Companies to
produce taxable income in future periods sufficient to fully utilize their
operating book/tax temporary differences and tax loss carryforwards. These
assessments have included actuarial projections under alternative scenarios of
future profits on the existing insurance in force of the ICH Companies,
including provisions for adverse deviation and assumptions regarding new
business. Valuation allowances totaling $9,135,000 and $9,389,000 were provided
against the ICH Companies' deferred tax assets at December 14, 1995 and December
31, 1994, respectively, to reflect the uncertainties of realizing all of the
benefits of temporary differences and available tax loss carryforwards.
Included in the deferred income tax asset at December 14, 1995 are tax
effects totaling $13,706,000 associated with unrealized investment gains
included in business equity. Included in the deferred income tax asset at
December 31, 1994 are tax effects totaling $25,143,000 associated with
unrealized investment losses included in business equity. Substantially all of
such unrealized investment losses at December 31, 1994, were attributable to the
available for sale fixed maturities. Management assessed the level of the ICH
Companies' cash and short-term investments, the quality and duration of their
available for sale fixed maturity portfolios, and the likelihood that the ICH
Companies would be required to dispose of a substantial portion of their
available for sale fixed maturities and incur net capital losses in order to
meet their liquidity needs. These assessments included a review of actuarial
cash flow projections under various interest rate scenarios and evaluations of
historical data relative to benefits and surrender activity. Management has
concluded based on such assessment that it is unlikely that the ICH Companies
would be required to incur significant capital losses to meet anticipated
liquidity needs over the near term and, accordingly, has reflected a deferred
tax asset relative to unrealized investment losses at December 31, 1994.
F-28
<PAGE> 41
INSURANCE OPERATIONS OF I.C.H. CORPORATION
ACQUIRED BY SOUTHWESTERN FINANCIAL CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
ICH and its subsidiaries, including the ICH Companies, have been under
examination by the Internal Revenue Service (IRS) for the tax years 1986 through
1992 and subsequently expanded its examination to include the years 1993, 1994
and 1995. In 1994, the IRS issued Notices of Proposed Deficiencies in the amount
of $127.7 million to ICH's insurance subsidiaries for the tax years 1986 through
1989. In August 1995, the subsidiaries agreed to settle this matter by paying
$33.6 million of additional income taxes and $34.6 million of interest
(calculated through September 30, 1995), which settlement was approved by the
U.S. Congress Joint Committee on Taxation. The ICH Companies have reflected
their allocable share of the settlement, approximately $3 million, in the
accompanying financial statements. The IRS recently completed its examination of
the tax years 1990 through 1995. On July 1, 1996, the IRS and ICH agreed on a
tentative settlement that will result in a net refund to ICH of approximately
$4.2 million. The settlement is subject to approval by the U.S. Congress Joint
Committee on Taxation and the U.S. Bankruptcy Court.
The ICH Companies, as former members of the ICH consolidated tax return,
have joint and several liability for taxes and interest deemed to be owed by the
ICH consolidated tax group. However, ICH has indemnified the ICH Companies and
has placed in escrow funds that are sufficient to satisfy the tax settlement for
the years through 1995. Based upon this indemnification, the escrowed funds, and
the fact that the IRS settlement results in a net refund, the ICH Companies
should not incur any material liability and, therefore, have not reflected any
such provision in the accompanying financial statements.
12. BENEFIT PLANS
The ICH Companies have not established retirement benefit plans for their
employees.
Effective January 1, 1993, the ICH Companies adopted SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions." SFAS
No. 106 requires that an enterprise accrue, during the years that an employee
renders the necessary service, the expected cost of providing postretirement
life and health care benefits to an employee and the employee's beneficiaries
and covered dependents. The ICH Companies' transition obligation as of January
1, 1993, approximated $11,990,000. The ICH Companies reflected a credit for the
cumulative effect to January 1, 1993, of providing postretirement benefits for
their remaining employees totaling $3,329,000. The cumulative credit has been
reflected net of $1,165,000 in related income tax effects. The ICH Companies'
obligation for accrued postretirement benefits is unfunded. Following is an
analysis of the change in the liability for accrued postretirement benefits for
the period from January 1, 1995 to December 14, 1995 (in thousands):
<TABLE>
<S> <C>
Accrued postretirement benefits, beginning of year......................... $12,891
-------
Recognition of components of net periodic postretirement benefit cost:
Service cost............................................................. 190
Interest cost............................................................ 760
Amortization of prior service costs...................................... (234)
-------
Net periodic postretirement benefit cost................................. 716
Benefit payments........................................................... (988)
Curtailment gain........................................................... (706)
Deemed contribution from reallocation of certain active and retired
employees among affiliates pursuant to sales of the ICH Companies to
SWF...................................................................... (4,428)
-------
Net change................................................................. (5,406)
-------
Accrued postretirement benefits, end of period............................. $ 7,485
=======
</TABLE>
F-29
<PAGE> 42
INSURANCE OPERATIONS OF I.C.H. CORPORATION
ACQUIRED BY SOUTHWESTERN FINANCIAL CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The liability for accrued postretirement benefits includes the following at
December 14, 1995 (in thousands):
<TABLE>
<S> <C>
Accumulated postretirement benefit obligation:
Retirees................................................. $ 6,302
Active eligible.......................................... --
Active ineligible........................................ --
-------
6,302
Unrecognized actuarial loss................................ (1,265)
Unrecognized prior service cost............................ 2,448
-------
Accrued postretirement benefits............................ $ 7,485
=======
</TABLE>
For measurement purposes, a 6.5% annual rate increase in the health care
cost trend rate was assumed for 1995; the rate was assumed to decrease gradually
to 4.5% by the year 2015 and remain at that level thereafter. The health care
cost trend rate assumption has a significant effect on the amounts reported. To
illustrate, increasing the assumed health care cost trend rates by 1 percentage
point in each year would increase the accumulated postretirement health care
benefit obligation as of December 14, 1995 by $528,000 and the aggregate of the
service and interest components of net periodic postretirement health care
benefit cost for 1995 by $195,000. The weighted average discount rate used in
determining the accumulated postretirement benefit obligation was 6.75%.
Effective January 1, 1995, the ICH Companies amended their postretirement life
and medical plans to require ten years at eligible service after age 45 for
eligibility of benefits. The change in eligibility rules resulted in a
curtailment gain of $706,000 during 1995.
13. INDUSTRY SEGMENT DATA
The ICH Companies are principally engaged in the sale and underwriting of
individual life and health insurance, and accumulation products. Total revenues
by segment reflect sales to unaffiliated customers. Operating earnings (loss)
equal total revenues less operating expenses.
Premium income and other considerations includes premium income, mortality
and administration charges, surrender charges and amortization of deferred
policy initiation fees. Net investment income and other income are allocated to
the segments based on rates ranging from 6% to 10% related to reserves generated
by each of the three insurance segments. Corporate revenues and operating
earnings include equity in earnings (losses) of equity investees and limited
partnerships and net investment income considered to be income applicable to the
investment of capital and surplus funds. Operating expenses are allocated to
each segment based on a number of assumptions and estimates and reported segment
operating results would change if different methods were applied. The mark-up
charged by FMI (see Note 3) is reflected as a corporate expense.
F-30
<PAGE> 43
INSURANCE OPERATIONS OF I.C.H. CORPORATION
ACQUIRED BY SOUTHWESTERN FINANCIAL CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1995 YEAR ENDED DECEMBER 31,
TO DECEMBER 14, ------------------------
1995 1994 1993
--------------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Individual life.................................. $ 165,625 $ 166,538 $ 153,624
Individual health................................ 168,069 168,316 163,086
Accumulation products............................ 90,764 36,950 59,232
Corporate........................................ 13,248 11,766 20,826
Realized investment gains (losses)............... (561) (73,065) 26,824
Gain (loss) on sale of subsidiaries.............. 145 (4,200) --
----------- ---------- ----------
Total revenues........................... $ 437,290 $ 306,305 $ 423,592
=========== ========== ==========
Operating earnings (loss):
Individual life.................................. $ 15,780 $ 16,953 $ 5,615
Individual health................................ (69) 10,784 19,166
Accumulation products............................ (3,373) (9,585) 7,400
Corporate........................................ 9,820 11,661 5,686
Realized investment gains (losses)............... (561) (73,065) 26,824
Gain (loss) on sale of subsidiaries.............. 145 (4,200) --
Amortization of excess cost...................... (11,540) (9,010) (9,010)
Change in accounting for excess of cost.......... -- (210,683) --
Interest expense................................. -- -- (1,516)
----------- ---------- ----------
Operating earnings (loss) from continuing
operations before income taxes......... $ 10,202 $ (267,145) $ 54,165
=========== ========== ==========
Total assets:
Individual life.................................. $ 1,323,590 $1,373,174 $1,424,417
Individual health................................ 204,134 176,057 175,789
Accumulation products............................ 421,899 739,843 805,214
Corporate........................................ 169,075 218,923 474,768
----------- ---------- ----------
$ 2,118,698 $2,507,997 $2,880,188
=========== ========== ==========
</TABLE>
14. SUPPLEMENTAL DATA TO CONSOLIDATED STATEMENTS OF CASH FLOWS
Fixed maturity investments held to maturity at amortized cost decreased
from $26,149,000 at December 31, 1993 to $15,915,000 at December 31, 1994. The
decrease was principally due to the redemption during 1994 of one security with
a book value of $10,000,000. No gain or loss was recorded on the redemption. No
purchases, sales or transfers of securities occurred in this category during the
period from January 1, 1995 to December 14, 1995.
Cash payments for income taxes were as follows (in thousands):
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1995 YEAR ENDED DECEMBER 31,
TO DECEMBER 14, -----------------------
1995 1994 1993
--------------- --------- ---------
<S> <C> <C> <C>
Income taxes................................... $ 3,409 $14,895 $72,505
</TABLE>
F-31
<PAGE> 44
INSURANCE OPERATIONS OF I.C.H. CORPORATION
ACQUIRED BY SOUTHWESTERN FINANCIAL CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The following reflects assets and liabilities disposed of relative to the
sale of Bankers New York during the period from January 1, 1995 to December 14,
1995, (in thousands):
<TABLE>
<S> <C>
Assets of subsidiary sold................................................ $ 244,109
Liabilities of subsidiary sold........................................... (210,367)
---------
Net investment in subsidiary sold.............................. $ 33,742
=========
</TABLE>
Because Bankers New York is reflected in net assets of discontinued
operations, the statement of cash flows reflects gross proceeds of $35,055,000.
The following reflects assets acquired and liabilities assumed relative to
the acquisition of Marquette (see Note 2), consideration given for such
acquisition and the net cash flow relative to such acquisition during the year
ended December 31, 1994 (in thousands):
<TABLE>
<S> <C>
Assets of acquired subsidiary.............................................. $ 8,177
Liabilities of acquired subsidiary......................................... (1,546)
Excess cost of investment in subsidiary over net assets acquired........... 1,584
-------
Cost of acquisition.............................................. $ 8,215
=======
Net cash flow from acquisition:
Cash paid for acquisition................................................ $ 8,215
Cash of acquired subsidiary.............................................. (4,626)
-------
Net cash required by acquisition................................. $ 3,589
=======
</TABLE>
15. OTHER OPERATING INFORMATION
Other operating costs and expenses for the period from January 1, 1995 to
December 14, 1995 and for the two years ended December 31, 1994 are as follows
(in thousands):
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1995 YEAR ENDED DECEMBER 31,
TO DECEMBER 14, -----------------------
1995 1994 1993
--------------- -------- --------
<S> <C> <C> <C>
Non-deferrable commission expense.............. $ 8,433 $ 8,488 $ 9,725
Taxes, licenses and fees....................... 11,196 10,523 10,426
General and administrative expenses............ 35,638 38,627 52,446
Consolidation expenses......................... -- -- 5,049
------- ------- -------
Other operating expenses............. $55,267 $57,638 $77,646
======= ======= =======
</TABLE>
For the years ended December 31, 1993, the ICH Companies reflected
consolidation and reorganization expenses totaling $5,049,000. The expenses were
associated with the operational consolidation of three of ICH's Texas-based
insurance subsidiaries, including Southwestern Life and Union Bankers.
F-32
<PAGE> 45
INSURANCE OPERATIONS OF I.C.H. CORPORATION
ACQUIRED BY SOUTHWESTERN FINANCIAL CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Changes in the value of business acquired for the period from January 1,
1995 to December 14, 1995 and for the two years ended December 31, 1994 are as
follows (in thousands):
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1995 YEAR ENDED DECEMBER 31,
TO DECEMBER 14, -----------------------
1995 1994 1993
--------------- --------- ---------
<S> <C> <C> <C>
Balance, beginning of year...................... $ 62,984 $ 43,938 $46,318
Amortization:
Cash flow realized............................ (11,576) (11,262) (8,237)
Interest capitalized.......................... 5,150 5,005 3,852
Impairment resulting from increased surrender
activity................................... -- (8,588) --
Sale of subsidiaries and reinsurance............ -- -- 2,005
Recapture of CFLIC business..................... -- 33,891 --
--------- -------- -------
Balance, end of year............................ $ 56,558 $ 62,984 $43,938
========= ======== =======
</TABLE>
The interest accrual rate for the value of business acquired ranged from 8%
to 10% during the period from January 1, 1995 to December 14, 1995 and for each
of the two years in the period ended December 31, 1994.
F-33
<PAGE> 46
================================================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE HEREBY, AND IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES
OTHER THAN THOSE TO WHICH IT RELATES OR ANY OFFER TO SELL, OR A SOLICITATION OF
AN OFFER TO BUY, OTHER THAN THOSE TO WHICH IT RELATES, IN ANY JURISDICTION TO
ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS NOT BEEN A CHANGE IN
THE FACTS SET FORTH IN THIS PROSPECTUS OR THE AFFAIRS OF THE COMPANY SINCE THE
DATE HEREOF OR THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT
TO THE DATE HEREOF.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................. 2
Incorporation of Certain Documents by
Reference........................... 2
The Company........................... 3
Risk Factors.......................... 3
Use of Proceeds....................... 4
Ratio of Earnings to Fixed Charges and
Preferred Stock Dividends........... 5
Selling Securityholders............... 5
Plan of Distribution.................. 5
Description of the Convertible
Preferred Stock..................... 6
Legal Matters......................... 10
Experts............................... 11
Index to Financial Statements......... F-1
</TABLE>
================================================================================
================================================================================
PENNCORP FINANCIAL
GROUP, INC.
2,875,000 SHARES
$3.50 SERIES II CONVERTIBLE
PREFERRED STOCK
4,118,911 SHARES
COMMON STOCK
-----------------
PROSPECTUS
-----------------
, 1996
================================================================================
<PAGE> 47
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Expenses in connection with the issuance and distribution of the
Convertible Preferred Stock and the Common Stock being registered, other than
underwriting discounts and commissions, are estimated (other than with respect
to the SEC Registration Fee) to be as follows:
<TABLE>
<S> <C>
SEC Registration Fee.......................................... $ 46,723
Accounting Fees and Expenses.................................. 25,000
Legal Fees and Expenses....................................... 30,000
Printing Fees and Expenses.................................... 30,000
Miscellaneous................................................. 5,000
--------
TOTAL............................................... $136,723
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Delaware law authorizes corporations to limit or to eliminate the personal
liability of directors to corporations and their stockholders for monetary
damages for breach of directors' fiduciary duty of care. The Registrant's
Certificate of Incorporation limits the liability of the Registrant's directors
to the Registrant or its stockholders to the fullest extent permitted by the
Delaware statute as in effect from time to time. Specifically, directors of the
Registrant will not be personally liable for monetary damages for breach of a
director's fiduciary duty as a director, except for liability (i) for any breach
of the director's duty of loyalty to the Registrant or its stockholders, (ii)
for acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (iii) for unlawful payments of dividends or
unlawful stock repurchases or redemptions as provided in the Delaware law, or
(iv) for any transaction from which the director derived an improper personal
benefit.
The Certificate of Incorporation of the Registrant provides that the
Registrant shall indemnify its officers and directors and former officers and
directors to the fullest extent permitted by the General Corporation Law of the
State of Delaware. Pursuant to the provisions of Section 145 of the General
Corporation Law of the State of Delaware, the Registrant has the power to
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending, or completed action, suit, or proceeding (other than
an action by or in the right of the Registrant) by reason of the fact that he is
or was a director, officer, employee, or agent of the Registrant, against any
and all expenses, judgments, fines, and amounts paid in settlement actually and
reasonably incurred in connection with such action, suit, or proceeding. The
power to indemnify applies only if such person acted in good faith and in a
manner he reasonably believed to be in the best interest, or not opposed to the
best interest, of the Registrant and with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful.
The power to indemnify applies to actions brought by or in the right of the
Registrant as well, but only to the extent of defense and settlement expenses
and not to any satisfaction of a judgment or settlement of the claim itself, and
with the further limitation that in such actions no indemnification shall be
made in the event of any adjudication of negligence or misconduct unless the
court, in its discretion, believes that in light of all the circumstances
indemnification should apply.
The statute further specifically provides that the indemnification
authorized thereby shall not be deemed exclusive of any other rights to which
any such officer or director may be entitled under any bylaws, agreements, vote
of stockholders or disinterested directors, or otherwise.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officer and controlling persons of the Registrant
pursuant to the provisions referred to in Item 15 above, or otherwise, the
Registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable. In the event that a
II-1
<PAGE> 48
claim for indemnification against such liabilities (other than payment by the
Registrant of expenses incurred or paid by a director, officer, or controlling
person of the Registrant in the successful defense of any action, suit, or
proceeding) is asserted by such director, officer, or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
ITEM 16. EXHIBITS.
The following is a list of all exhibits filed as a part of this
Registration Statement.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- -------------------- ------------------------------------------------------------------------
<C> <S>
3.1 -- Certificate of Designation for $3.50 Series II Convertible Preferred
Stock.+
4.2 -- Registration Rights Agreement, dated as of August 2, 1996, by and
between the Registrant and Smith Barney Inc., Donaldson, Lufkin &
Jenrette Securities Corporation and Merrill Lynch, Pierce, Fenner &
Smith Incorporated.(1)
5.1 -- Opinion of Weil, Gotshal & Manges LLP.+
12.1 -- Statement re computation of ratios of earnings to fixed charges and
preferred stock dividends.+
15.1 -- Letter from KPMG Peat Marwick LLP regarding unaudited interim
financial information.+
23.1 -- Consent of Weil, Gotshal & Manges LLP (included in opinion filed as
Exhibit 5.1 to this Registration Statement).+
23.2 -- Consent of KPMG Peat Marwick LLP.+
23.3 -- Consent of Deloitte & Touche LLP.+
23.4 -- Consent of Deloitte & Touche LLP.+
23.5 -- Consent of Coopers & Lybrand L.L.P.+
24.1 -- Power of Attorney (included on page II-4 of this Registration
Statement).
</TABLE>
- ---------------
+ Filed herewith.
(1) Incorporated by reference to the Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996 of PennCorp Financial Group, Inc.
ITEM 17. UNDERTAKINGS
The Registrant hereby undertakes the following:
(a)(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
II-2
<PAGE> 49
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the
registration statement is on Form S-3 or Form S-8, and the information required
to be included in a post-effective amendment by those paragraphs is contained in
periodic reports filed with or furnished to the Commission by the registrant
pursuant to Section 13 or 15(d) of the Exchange Act that are incorporated by
reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) For purposes of determining any liability under the Securities Act of
1933, each filing of the Registrant's annual report pursuant to Section 13(a) or
15(d) of the Exchange Act that is incorporated by reference in this Registration
Statement shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(c) See Item 15.
II-3
<PAGE> 50
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, State of New York, on September 30, 1996.
PENNCORP FINANCIAL GROUP, INC.
By: /s/ SCOTT D. SILVERMAN
--------------------------------
Scott D. Silverman
Senior Vice President, General
Counsel and Secretary
Each person whose signature to this Registration Statement appears below
hereby appoints David J. Stone, Steven W. Fickes, Scott D. Silverman and James
P. McDermott, and each individually, any one of whom may act without the joinder
of the others, as his agent and attorney-in-fact to sign on his behalf
individually and in the capacity stated below and to file all pre- and
post-effective amendments to this Registration Statement, which may make such
changes and additions to this Registration Statement as such agent and
attorney-in-fact may deem necessary or appropriate.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ---------------------------- ------------------
<S> <C> <C>
/s/ DAVID J. STONE Chairman of the Board, Chief September 30, 1996
- --------------------------------------------- Executive Officer and
David J. Stone Director (Principal
Executive Officer)
/s/ STEVEN W. FICKES President, Chief Financial September 30, 1996
- --------------------------------------------- Officer and Director
Steven W. Fickes (Principal Financial and
Accounting Officer)
/s/ ALAN D. GREENBERG Vice Chairman and Director September 30, 1996
- ---------------------------------------------
Allan D. Greenberg
* Director September 30, 1996
- ---------------------------------------------
William M. McCormick
/s/ THOMAS A. PLAYER Director September 30, 1996
- ---------------------------------------------
Thomas A. Player
/s/ KENNETH ROMAN Director September 30, 1996
- ---------------------------------------------
Kenneth Roman
/s/ BRUCE W. SCHNITZER Director September 30, 1996
- ---------------------------------------------
Bruce W. Schnitzer
/s/ MAURICE W. SLAYTON Director September 30, 1996
- ---------------------------------------------
Maurice W. Slayton
/s/ DAVID C. SMITH Director September 30, 1996
- ---------------------------------------------
David C. Smith
</TABLE>
II-4
<PAGE> 51
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- -------------------- ------------------------------------------------------------------------
<C> <S>
3.1 -- Certificate of Designation for $3.50 Series II Convertible Preferred
Stock.+
4.2 -- Registration of Rights Agreement, dated as of August 2, 1996, by and
between the Registrant and Smith Barney Inc., Donaldson, Lufkin &
Jenrette Securities Corporation and Merrill Lynch, Pierce, Fenner &
Smith Incorporated.(1)
5.1 -- Opinion of Weil, Gotshal & Manges LLP.+
12.1 -- Statement re computation of ratios of earnings to fixed charges and
preferred stock dividends.+
15.1 -- Letter from KPMG Peat Marwick LLP regarding unaudited interim
financial information.+
23.1 -- Consent of Weil, Gotshal & Manges LLP (included in opinion filed as
Exhibit 5.1 to this Registration Statement).+
23.2 -- Consent of KPMG Peat Marwick LLP.+
23.3 -- Consent of Deloitte & Touche LLP.+
23.4 -- Consent of Deloitte & Touche LLP.+
23.5 -- Consent of Coopers & Lybrand L.L.P.+
24.1 -- Power of Attorney (included on page II-4 of this Registration
Statement).
</TABLE>
- ---------------
+ Filed herewith.
(1) Incorporated by reference to the Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996 of PennCorp Financial Group, Inc.
II-5
<PAGE> 1
EXHIBIT 3.1
CERTIFICATE OF DESIGNATION
OF
$3.50 SERIES II CONVERTIBLE PREFERRED STOCK
OF
PENNCORP FINANCIAL GROUP, INC.
Pursuant to Section 151(g) 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 of PennCorp Financial
Group, Inc., a Delaware corporation (the "Corporation"), by unanimous written
consent:
RESOLVED, that pursuant to the authority conferred on the
Board of Directors of the Corporation by provisions of the Corporation's
Certificate of Incorporation, as amended, and pursuant to Section 151(g) of the
General Corporation Law of the State of Delaware, the President and Secretary
or Assistant Secretary of the Corporation be, and they hereby are, authorized
and directed to execute and file with the Secretary of State of the State of
Delaware the Certificate of Designation of Convertible Preferred Stock of the
Corporation fixing the designation, powers, preferences and rights of a new
series of the Corporation's Convertible Preferred Stock, and the
qualifications, limitations or restrictions thereof, as follows:
1. Number of Shares; Designation. A total of 2,875,000 shares of
Preferred Stock, par value of $.01 per share, of the Corporation are hereby
designated as $3.50 Series II Convertible Preferred Stock (the "Series"). The
number of authorized shares of the Series may be decreased, at any time and
from time to time, by resolution of the Board of Directors of the Corporation;
provided, however, that no decrease shall reduce the authorized number of
shares of the Series to a number less than the number of shares outstanding.
2. Rank. The Series shall, with respect to payment of dividends,
redemption payments and rights upon liquidation, dissolution or winding up of
the affairs of the Corporation, rank senior and prior to (a) the Common Stock,
par value $.01 per share, of the Corporation (the "Common Stock") and (b) any
other class or series of capital stock of the Corporation that by its terms
ranks junior to the Series as to payment of dividends, redemption payments and
rights upon liquidation, dissolution or winding up of the affairs of the
Corporation.
<PAGE> 2
3. Dividends. (a) The cash dividend rate on shares of the Series
shall be $3.50 per share per annum (based upon the liquidation of $50.00 per
share). Dividends on shares of the Series shall be fully cumulative, accruing,
without interest, from the most recent date to which dividends have been paid
or, if none have been paid, from the date of original issuance of the Series,
and shall be payable quarterly in arrears, when, as and if declared by the
Board of Directors out of funds legally available for the payment of dividends
on February 1, May 1, August 1 and November 1 of each year (each, a "Dividend
Payment Date"), commencing November 1, 1996, except that if any Dividend
Payment Date is not a business day then the Dividend Payment Date shall be on
the first immediately succeeding business day (as used herein, the term
"business day" shall mean any day except a Saturday, Sunday or day on which
banking institutions are legally authorized to close in the City of New York).
Each dividend shall be paid to the holders of record of shares of the Series as
they appear on the stock register of the Corporation at the close of business
on such record dates (each, a "Dividend Payment Record Date"), which shall be
not more than 60 days nor fewer than 10 days preceding each Dividend Payment
Date thereof, as shall be fixed by the Board of Directors of the Corporation.
Dividends payable for each quarterly dividend period shall be computed by
dividing the annual dividend by four. Dividends payable for any partial
dividend period shall be computed on the basis of a 360-day year of twelve
30-day months. Dividends on account of arrears for any past dividend periods
may be declared and paid at any time, without reference to any regular Dividend
Payment Date, to holders of record on such date, not exceeding 60 days nor
fewer than 10 days preceding the date on which dividends in arrears will be
paid, as may be fixed by the Board of Directors of the Corporation. No
interest shall be payable with respect to any dividend payment that may be in
arrears. Holders of shares of the Series shall be entitled to receive
dividends in preference to and in priority over dividends upon the Common
Shares and any other series or class of the Corporation's capital stock that
ranks junior as to dividends to the Series ("Junior Dividend Shares") and shall
be on a parity as to dividends with any series or class of the Corporation's
capital stock that does not rank senior or junior as to dividends with the
Series ("Parity Dividend Shares"). The holders of shares of the Series shall
not be entitled to any dividends other than the cash dividends provided for in
this Section 3.
(b) No dividends, other than dividends payable solely in
Common Shares, Junior Dividend Shares, or warrants or other rights to acquire
such Common Shares or Junior Dividend Shares, shall be paid or declared and set
apart for payment on, and no
2
<PAGE> 3
purchase, redemption or other acquisition shall be made by the Corporation of,
any Common Shares or Junior Dividend Shares unless and until all accrued and
unpaid dividends on the Series, including the full dividend for the
then-current quarterly dividend period, shall have been paid or declared and
set apart for payment without interest.
(c) If at any time the Corporation issues any class or
series of capital stock ranking senior and prior to the Series with respect to
the payment of dividends ("Senior Dividend Shares") and fails to pay or declare
and set apart for payment accrued and unpaid dividends on such Senior Dividend
Shares, in whole or in part, then (except to the extent allowed by the terms of
the Senior Dividend Shares) no dividend shall be paid or declared and set apart
for payment on the Series unless and until all accrued and unpaid dividends
with respect to the Senior Dividend Shares, including the full dividends for
the then-current dividend period, shall have been paid or declared and set
apart for payment, without interest. Except as provided in Section 3(d) below,
no dividends shall be paid or declared and set apart for payment on any Parity
Dividend Shares for any period unless the Company has paid or declared and set
apart for payment, or contemporaneously pays or declares and sets apart for
payment, on the Series all accrued and unpaid dividends for all dividend
payment periods terminating on or prior to the date of payment of such
dividends. Except as provided in Section 3(d) below, no dividends shall be
paid or declared and set apart for payment on the Series for any period unless
the Company has paid or declared and set apart for payment, or
contemporaneously pays or declares and sets apart for such payment, on any
Parity Dividend Shares all accrued and unpaid dividends for all dividend
payment periods terminating on or prior to the date of payment of such
dividends.
(d) If at any time the Corporation has failed to pay
accrued dividends on any shares of the Series on any Dividend Payment Date or
any Parity Dividend Shares on a stated payment date, as the case may be, the
Corporation shall not:
(i) purchase any shares of the Series or Parity
Dividend Shares (except for a consideration payable in Common Shares
or Junior Dividend Shares) or redeem fewer than all of the shares of
the Series and Parity Dividend Shares then outstanding except for (x)
the repurchase or redemption of shares of the Series made pro rata
among the holders of the shares of the Series then
3
<PAGE> 4
outstanding and (y) the repurchase or redemption made pro rata with
respect to all shares of the Series and Parity Dividend Shares then
outstanding so that the amounts repurchased or redeemed shall in all
cases bear to each other the same ratio that, at the time of the
repurchase or redemption, the required redemption payments on the
shares of the Series and the other Parity Dividend Shares then
outstanding, respectively, bear to each other, or
(ii) permit any corporation or other entity
directly or indirectly controlled by the Corporation to purchase any
Common Shares, Junior Dividend Shares, shares of the Series or Parity
Dividend Shares, except to the same extent that the Corporation could
purchase such shares.
Unless and until all dividends accrued but unpaid in respect
of prior dividend payment periods on shares of the Series and any Parity
Dividend Shares at the time outstanding have been paid in full or a sum
sufficient for such payment is declared and set apart, as provided in the
preceding paragraph, all dividends accrued by the Corporation upon shares of
the Series or Parity Dividend Shares shall be declared pro rata with respect to
all shares of the Series and Parity Dividend Shares then outstanding, so that
the amounts of any dividends declared on shares of the Series and on the Parity
Dividend Shares shall in all cases bear to each other the same ratio that, at
the time of the declaration, all accrued but unpaid dividends in respect of
prior dividend payment periods on shares of the Series and the other Parity
Dividend Shares, respectively, bear to each other.
4. Optional Redemptions for Cash. (a) Shares of the Series shall
not be redeemable prior to August 2, 1999. Thereafter, subject to the
restrictions in Section 3 above, shares of the Series may be redeemed by the
Corporation, in whole or in part, at the option of the Corporation at the
following redemption prices per share if redeemed during the 12-month period
beginning August 1 (August 2 in the case of 1999) in the year indicated below:
<TABLE>
<CAPTION>
Redemption Redemption
Year Price Year Price
---- ----- ---- -----
<S> <C> <C> <C>
1999 . . . . . . . . . $52.45 2003 . . . . . . . . . . $51.05
2000 . . . . . . . . . 52.10 2004 . . . . . . . . . . 50.70
2001 . . . . . . . . . 51.75 2005 . . . . . . . . . . 50.35
2002 . . . . . . . . . 51.40 2006 and thereafter . . . 50.00
</TABLE>
4
<PAGE> 5
plus, in each case, an amount equal to the dividends accrued and unpaid
thereon, whether or not declared, to the redemption date ("Optional Redemption
Price").
(b) Not less than 15 nor more than 60 days (such date as
fixed by the Board of Directors of the Corporation referred to herein as the
"Redemption Record Date") prior to the date fixed for any redemption of shares
of the Series pursuant to this Section 4, a notice specifying the time and
place of the redemption and the number of shares to be redeemed shall be given
by first class mail, postage prepaid, to the holders of record on the
Redemption Record Date of the shares of the Series to be redeemed at their
respective addresses as the same shall appear on the books of the Corporation,
calling upon each holder of record to surrender to the Corporation on the
redemption date at the place designated in the notice such holder's certificate
or certificates representing the number of shares specified in the notice of
redemption. Neither failure to mail such notice, nor any defect therein or in
the mailing thereof, to any particular holder shall affect the sufficiency of
the notice or the validity of the proceedings for redemption with respect to
the other holders. Any notice mailed in the manner herein provided shall be
conclusively presumed to have been duly given whether or not the holder
receives the notice. On or after the redemption date, each holder of shares of
the Series to be redeemed shall present and surrender such holder's certificate
or certificates for such shares to the Corporation at the place designated in
the redemption notice and thereupon the Optional Redemption Price of the shares
shall be paid to or on the order of the person whose name appears on such
certificate or certificates as the owner thereof, and each surrendered
certificate shall be canceled. In case fewer than all the shares represented
by any such certificate are redeemed, a new certificate shall be issued
representing the unredeemed shares.
(c) If a notice of redemption has been given pursuant to
this Section 4 and if, on or before the redemption date, the funds necessary
for such redemption (including all dividends on the shares of the Series to be
redeemed that will accrue to but not including the redemption date) shall have
been set aside by the Corporation, separate and apart from its other funds, in
trust for the pro rata benefit of the holders of the shares so called for
redemption, then, 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 of the Series to be redeemed, and at the close of
business on the date on which such funds have been segregated and set aside by
the Corporation as provided in this
5
<PAGE> 6
EXHIBIT 3.1
Section 6(c), the holders of such shares shall cease to be stockholders with
respect to those shares, shall have no interest in or claims against the
Corporation by virtue thereof and shall have no voting or other rights with
respect thereto, except the conversion rights provided in Section 6 below and
the right to receive the moneys payable upon such redemption, without interest
thereon, 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 and unclaimed at the end of two years from the redemption date
shall revert to the general funds of the Corporation, after which reversion the
holders of such shares so called for redemption shall look only to the general
funds of the Corporation for the payment of the Optional Redemption Price,
without interest. Any interest accrued on funds so deposited shall belong to
the Corporation and be paid thereto from time to time.
(d) If a notice of redemption has been given pursuant to
this Section 4 and any holder of shares of the Series shall, prior to the close
of business on the redemption date, give written notice to the Corporation
pursuant to Section 6 below of the conversion of any or all of the shares to be
redeemed held by the holder (accompanied by a certificate or certificates for
such shares, duly endorsed or assigned to the Corporation, and any necessary
transfer tax payment, as required by Section 6 below), then such redemption
shall not become effective as to such shares to be converted and such
conversion shall become effective as provided in Section 6 below, whereupon any
funds deposited by the Corporation for the redemption of such shares shall
(subject to any right of the holder of such shares to receive the dividend
payable thereon as provided in Section 6 below) immediately upon such
conversion be returned to the Corporation or, if then held in trust by the
Corporation, shall automatically and without further corporate action or notice
be discharged from the trust.
(e) In every case of redemption of fewer than all of the
outstanding shares of the Series pursuant to this Section 4, the shares to be
redeemed shall be selected pro rata or by lot or in such other manner as the
Board of Directors of the Corporation may determine, as may be prescribed by
resolution of the Board of Directors of the Corporation, provided that only
whole shares shall be selected for redemption.
5. Liquidation. (a) The liquidation value of shares of the
Series, in case of the voluntary or involuntary liquidation, dissolution or
winding-up of the Corporation, shall be $50.00 per share, plus an amount equal
to the dividends accrued and unpaid
6
<PAGE> 7
thereon, whether or not declared, to the payment date (the "Liquidation
Value").
(b) In the event of any voluntary or involuntary
liquidation, dissolution or winding-up of the Corporation, the holders of
shares of the Series (i) shall not be entitled to receive the Liquidation Value
of the shares held by them until payment in full or provision has been made for
the payment of all claims of creditors of the Corporation and the liquidation
preference of any class of series of capital stock ranking senior to the Series
with respect to redemption rights and rights upon liquidation, dissolution or
winding up of the affairs of the Corporation ("Senior Liquidation Shares")
shall have bene paid in full and (ii) shall be entitled to receive the
Liquidation Value of such shares held by them in preference to and in priority
over any distributions upon the Common Shares and any other series or class of
the Corporation's capital stock that ranks junior as to the Series as to
redemption rights and rights upon liquidation, dissolution or winding up of the
affairs of the Corporation ("Junior Liquidation Shares"). Upon payment in full
of the Liquidation Value to which the holders of shares of the Series are
entitled, the holders of shares of the Series will not be entitled to any
further participation in any distribution of assets by the Corporation.
Subject to clause (i) above, if the assets of the Corporation are not
sufficient to pay in full the Liquidation Value payable to the holders of
shares of the Series and the liquidation preference payable to the holders of
any series or class of the Corporation's capital stock outstanding on the date
hereof or hereafter issued, that ranks on a parity with the Series as to
redemption rights and rights upon liquidation, dissolution or winding up of the
affairs of the Corporation ("Parity Liquidation Shares"), the holders of all
such shares shall shares ratably in accordance with the respective preferential
amounts payable on such shares in any distribution.
(c) Neither a consolidation or merger of the Corporation
with or into any other entity, nor a merger of any other entity with or into
the Corporation, nor a sale or transfer of all or any part of the Corporation's
assets for cash, securities or other property shall be considered a
liquidation, dissolution or winding-up of the Corporation within the meaning of
this Section 5.
6. Conversion. (a) Holders of shares of the Series will have the
right, exercisable at any time after November 5, 1996, except in the case of
shares of the Series called for redemption (as described in Section 4(d)
above), to convert shares of the Series into shares of Common Stock at the
conversion price of
7
<PAGE> 8
$34.90 per share of Common Stock, subject to adjustment as described below in
Section 6(f) (the "Conversion Price"). The number of shares of Common Stock
into which a share of the Series shall be convertible (calculated as to each
conversion to the nearest 1/100th of a share) shall be determined by dividing
$50.00 by the Conversion Price then in effect. In the case of shares of the
Series called for redemption, conversion rights will expire at the close of
business on the redemption date. Certificates representing shares of the
Series surrendered for conversion during the period between the close of
business on any Dividend Payment Record Date and the opening of business on any
corresponding Dividend Payment Date must be accompanied by payment of an amount
equal to the dividend payable on such shares on such Dividend Payment Date. No
such payment will be required to accompany shares of the Series called for
redemption and surrendered during the period between the close of business on
any Dividend Payment Record Date and the opening of business on any
corresponding Dividend Payment Date. Notwithstanding the foregoing, a holder
of shares of the Series on a Dividend Payment Record Date who (or whose
transferee) tenders any such shares of conversion into shares of Common Stock
on the relevant Dividend Payment Date shall be entitled to receive the dividend
payable by the Company on such shares of the Series on such Dividend Payment
Date, and the converting holder need not include payment of the amount of such
dividend upon surrender of shares of the Series for conversion. Except as
provided in the immediately preceding sentence, no payment or allowance for
accrued dividends on the shares of the Series is to be made on conversion.
(b) Any holder of shares of the Series electing to
convert the shares of any portion thereof in accordance with Section 6(a) above
shall deliver the certificates therefor and the dividend payment referred to in
Section 6(a) above, if applicable, to the principal office of any transfer
agent for the Common Stock, with a form of conversion notice fully completed
and duly executed and, if required by Section 6(a) above, accompanied by
payment of an amount equal to the dividend payable on such shares on the
applicable Dividend Payment Date. The conversion right with respect to any
shares of the Series shall be deemed to have been exercised at the date upon
which the certificates therefor and the dividend payment referred to in Section
6(a) above, if applicable, with the conversion notice duly executed (and the
payment required by Section 6(d), if applicable), shall have been so delivered,
and the person or persons entitled to receive the Common Stock issuable upon
conversion shall be treated for all purposes as the record holder or holders of
such Common Stock upon that date.
8
<PAGE> 9
(c) No fractional shares of Common Stock or scrip
representing fractional shares shall be issued upon conversion of shares of the
Series. If more than one share of the Series shall be surrendered for
conversion at one time by the same record holder, the number of full shares of
Common Stock issuable upon conversion thereof shall be computed on the basis of
the aggregate number of shares of the Series so surrendered. Instead of any
fractional share of Common Stock otherwise issuable upon conversion of any
shares of the Series, the Corporation shall pay a cash adjustment in respect of
such fraction in an amount equal to the same fraction of Sale Price of the
Common Stock at the close of business on the day of conversion. In the absence
of a Sale Price, the Board of Directors shall in good faith determine the
current market price on such basis as it considers appropriate and such current
market price shall be used to calculate the cash adjustment. As used herein,
"Sale Price" means the closing sales price of the Common Stock (or if no sale
price is reported, the average of the high and low bid prices) as reported by
the principal national or regional stock exchange on which the Common Stock is
listed or, if the Common Stock is not listed on a national or regional stock
exchange, as reported by the Nasdaq Stock Market and if not so reported, then as
reported by the National Quotation Bureau Incorporated.
(d) If a holder converts shares of the Series, the
Corporation shall pay any documentary, stamp or similar issue or transfer tax
due on the issue of Common Stock upon the conversion or due upon the issuance
of a new certificate or certificates for any shares of the Series not
converted. The holder, however, shall pay any such tax that is due because any
such shares of the Common Stock or of the Series are issued in a name other
than the name of the holder.
(e) The Corporation shall reserve out of its authorized
but unissued Common Stock or its Common Stock held in treasury enough shares of
Common Stock to permit the conversion of all of the then-outstanding shares of
the Series. For the purposes of this Section 6(e), the full number of shares
of Common Stock then issuable upon the conversion of all then-outstanding
shares of the Series shall be computed as if at the time of computation all
outstanding shares of the Series were held by a single holder. The
Corporation shall from time to time, in accordance with the laws of the State
of Delaware and its certificate of incorporation, increase the authorized
amount of its Common Stock if at any time the authorized amount of its Common
Stock remaining unissued shall not be sufficient to permit the conversion of
all shares of the Series at the time outstanding. If any shares of Common
Stock required to be reserved for issuance upon conversion of shares of the
Series hereunder
9
<PAGE> 10
require registration with or approval of any governmental authority under
federal or state law before the shares may be issued upon conversion, the
Corporation will in good faith and as expeditiously as possible endeavor to
cause the shares to be so registered or approved. All shares of Common Stock
issued upon conversion of the shares of the Series shall be validly issued,
fully paid and nonassessable.
(f) The Conversion Price shall be subject to adjustment
as follows:
(i) In case the Corporation shall (A) pay a
dividend on any class of its capital stock in shares of its Common
Stock, (B) subdivide its outstanding shares of Common Stock into a
greater number of shares or (C) combine its outstanding shares of
Common Stock into a smaller number of shares, the Conversion Price in
effect immediately prior thereto shall be adjusted retroactively as
provided below so that the Conversion Price thereafter shall be
determined by multiplying the Conversion Price at which the shares of
the Series were theretofore convertible by a fraction of which the
denominator shall be the number of shares of Common Stock outstanding
immediately following such action and of which the numerator shall be
the number of shares of Common Stock outstanding immediately prior
thereto. Such adjustment shall be made whenever any event listed
above shall occur and shall become effective retroactively immediately
after the record date in the case of a dividend and immediately after
the effective date in the case of a subdivision or combination.
(ii) In case the Corporation shall issue rights or
warrants to all holders of its Common Stock entitling them (for a
period expiring within 45 days after the record date for determining
stockholders entitled to receive such rights or warrants) to subscribe
for or purchase shares of Common Stock at a price per share less than
the current market price per share of Common Stock (as determined in
accordance with the provisions of Section 6(f)(iv) below) at the
record date therefor (the "Current Market Price"), or in case the
Corporation shall issue to all holders of its Common Stock other
securities convertible into or exchangeable for Common Stock for a
consideration per share of Common Stock deliverable upon conversion or
exchange thereof less than the Current Market Price, then the
Conversion Price in effect immediately prior thereto shall be adjusted
as provided below so that the Conversion Price therefor shall be equal
to the price determined by multiplying (A) the
10
<PAGE> 11
Conversion Price at which shares of the Series were theretofore
convertible by (B) a fraction of which the denominator shall be the
sum of (1) the number of shares of Common Stock outstanding on the
date of issuance of the convertible or exchangeable securities, rights
or warrants and (2) the number of additional shares of Common Stock
offered for subscription or purchase, or issuable upon such conversion
or exchange, and of which the numerator shall be the sum of (1) the
number of shares of Common Stock outstanding on the date of issuance
of such convertible or exchangeable securities, rights or warrants and
(2) the number of additional shares of Common Stock which the
aggregate offering price of the number of shares of Common Stock so
offered would purchase at the Current Market Price per share of Common
Stock (as determined in accordance with the provisions of Section
6(f)(iv) below). Such adjustment shall be made whenever such
convertible or exchangeable securities, rights or warrants are issued,
and shall become effective immediately after the record date for the
determination of stockholders entitled to receive such securities.
However, upon the expiration of any right or warrant to purchase
Common Stock, the issuance of which resulted in an adjustment in the
Conversion Price pursuant to this Section 6(f)(ii), if any such right
or warrant shall expire and shall not have been exercised, the
Conversion Price shall be recomputed immediately upon such expiration
and effective immediately upon such expiration shall be increased to
the price it would have been (but reflecting any other adjustments to
the Conversion Price made pursuant to the provisions of this Section
6(f) after the issuance of such rights or warrants) had the adjustment
of the Conversion Price made upon the issuance of such rights or
warrants been made on the basis of offering for subscription or
purchase only that number of shares of Common Stock actually purchased
upon the exercise of such rights or warrants. No further adjustment
shall be made upon exercise of any right, warrant, convertible
security or exchangeable security if an adjustment shall have been
made upon issuance of such security.
(iii) In case the Corporation shall pay a dividend
to all holders of its Common Stock (including any dividend paid in
connection with a consolidation or merger in which the Corporation is
the continuing corporation) of any shares of capital stock of the
Corporation or its subsidiaries (other than Common Stock) or evidences
of its indebtedness or assets (excluding cash dividends payable solely
in cash that may from time to time be fixed by the Board of
11
<PAGE> 12
Directors, or dividends or distributions in connection with the
liquidation, dissolution or winding up of the Corporation) or rights
or warrants to subscribe for or purchase any of its securities or
those of its subsidiaries or securities convertible or exchangeable
for Common Stock (excluding those securities referred to in Section
6(f)(ii) above), then in each such case the Conversion Price in effect
immediately prior thereto shall be adjusted as provided below so that
the Conversion Price thereafter shall be equal to the price determined
by multiplying (A) the Conversion Price in effect on the record date
mentioned below by (B) a fraction, the numerator of which shall be the
Current Market Price per share of Common Stock on the record date
mentioned below less the then fair market value (as determined by the
Board of Directors, whose good faith determination shall be
conclusive) as of such record date of the assets, evidences of
indebtedness or securities so paid with respect to one share of Common
Stock, and the denominator of which shall be the Current Market Price
per share of Common Stock on such record date; provided, however, that
in the event the then fair market value (as so determined) so paid
with respect to one share of Common Stock is equal to or greater than
the Current Market Price per share of Common Stock on the record date
mentioned above, in lieu of the foregoing adjustment, adequate
provision shall be made so that each holder of shares of the Series
shall have the right to receive the amount and kind of assets,
evidences of indebtedness, or securities such holder would have
received had such holder converted each such share of the Series
immediately prior to the record date for such dividend. Such
adjustment shall be made whenever any such payment is made, and shall
become effective retroactively immediately after the record date for
the determination of stockholders entitled to receive the payment.
(iv) For the purpose of any computation under
Sections 6(f)(ii) and 6(f)(iii) above, the Current Market Price per
share of Common Stock at any date shall be deemed to be the average
Sale Price for the 30 consecutive trading days commencing 45 trading
days before the day in question.
(v) No adjustment in the Conversion Price shall
be required unless the adjustment would require an increase or
decrease of at least 1% in the Conversion Price then in effect;
provided, however, that any adjustments that by reason of this Section
6(f)(v) are not required to be made shall be carried forward and taken
into account in any
12
<PAGE> 13
subsequent adjustment. All calculations under this Section 6(f) shall
be made to the nearest cent.
(vi) In the event that, at any time as a result of
an adjustment made pursuant to Section 6(f)(i) or 6(f)(iii) above, the
holder of any share of the Series thereafter surrendered for
conversion shall become entitled to receive any shares of the
Corporation other than shares of the Common Stock, thereafter the
number of such other shares so receivable upon conversion of any share
of the Series shall be subject to adjustment from time to time in a
manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Common Stock contained in Section
6(f)(i) through 6(f)(v) above, and the other provisions of this
Section 6 with respect to the Common Stock shall apply on like terms
to any such other shares.
(vii) Whenever the Conversion Price is adjusted, as
herein provided, the Corporation shall promptly file with the transfer
agent for the Series a certificate of an officer of the Corporation
setting forth the Conversion Price after the adjustment and setting
forth a brief statement of the facts requiring such adjustment and a
computation thereof. The certificate shall be conclusive evidence of
the correctness of the adjustment. The Corporation shall promptly
cause a notice of the adjusted Conversion Price to be mailed to each
registered holder of shares of the Series.
(viii) In case of any reclassification of the Common
Stock, any consolidation of the Corporation with, or merger of the
Corporation into, any other entity, any merger of another entity into
the Corporation (other than a merger that does not result in any
reclassification, conversion, exchange or cancellation of outstanding
shares of Common Stock of the Corporation), any sale or transfer of
all or substantially all of the assets of the Corporation or any
compulsory share exchange pursuant to which share exchange the Common
Stock is converted into other securities, cash or other property, then
lawful provision shall by made as part of the terms of such
transaction whereby the holder of each share of the Series then
outstanding shall have the right thereafter, during the period such
share shall be convertible, to convert such share only into the kind
and amount of securities, cash and other property receivable upon the
reclassification, consolidation, merger, sale, transfer or share
exchange by a holder of the number of shares of Common Stock of the
Corporation into which a share
13
<PAGE> 14
of the Series would have been convertible immediately prior to the
reclassification, consolidation, merger, sale, transfer or share
exchange. The Corporation, the person formed by the consolidation or
resulting from the merger or which acquires such assets or which
acquires the Corporation's shares, as the case may be, shall make
provisions in its certificate or articles of incorporation or other
constituent document to establish such rights. The certificate or
articles of incorporation or other constituent document shall provide
for adjustments, which, for events subsequent to the effective date of
the certificate or articles of incorporation or other constituent
document, shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Section 6. The provisions of this
Section 6(f)(viii) shall similarly apply to successive
reclassifications, consolidations, mergers, sales, transfers or share
exchanges.
(g) The Corporation from time to time may reduce the
Conversion Price by any amount for any period of time if the period is at least
20 days and if the reduction is irrevocable during the period. Whenever the
Conversion Price is so reduced, the Corporation shall mail to holders of record
of the Series a notice of the reduction at least 15 days before the date the
reduced Conversion Price takes effect, stating the reduced Conversion Price and
the period it will be in effect. A voluntary reduction of the Conversion Price
does not change or adjust the Conversion Price otherwise in effect for purposes
of paragraph 6(f) above.
7. Status of Shares. All shares of the Series that are at any
time redeemed pursuant to Section 4 above or converted pursuant to Section 6
above and all shares of the Series that are otherwise reacquired by the
Corporation and subsequently cancelled by the Board of Directors of the
Corporation shall have the status of authorized but unissued shares of
Preferred Stock, without designation as to series, subject to reissuance by the
Board of Directors of the Corporation as shares of any one or more other
series.
8. Voting Rights. Except as set forth below or otherwise
required by law, holders of shares of the Series shall have no voting rights.
In connection with any right to vote, such holder of shares of the Series will
have one vote for each share held.
14
<PAGE> 15
(a) Dividend Defaults.
(i) Whenever, at any time or times, dividends
payable on the shares of the Series at the time outstanding shall be
in arrears in an aggregate amount equal to at least six quarterly
dividend payments (whether or not consecutive), the holders of shares
of the Series shall have the right, voting separately as a class with
holders of Parity Dividend Shares to the extent such Parity Dividend
Shares have such voting rights (the shares of the Series and any such
other Parity Dividend Shares, collectively for purposes of this
Section 8, the "Defaulted Preferred Stock"), to elect two directors of
the Corporation at the Corporation's next annual meeting of
stockholders and at each subsequent annual meeting of stockholders;
provided, however, that if such voting rights shall become vested more
than 90 days or less than 20 days before the date prescribed for the
annual meeting of stockholders, the holders of the shares of Defaulted
Preferred Stock shall be entitled to exercise their voting rights at a
special meeting of the holders of shares of Defaulted Preferred Stock
as set forth in Section 8(a)(ii) hereof. At elections for such
directors, each holder of shares of the Series shall be entitled to
one vote for each share held (the holders of Defaulted Preferred Stock
being entitled to such number of votes, if any, for each share of
stock held as may be granted to them). Upon the vesting of such
voting rights, the maximum authorized number of members of the Board
of Directors of the Corporation shall automatically be increased by
two and the two vacancies so created shall be filled by vote of the
holders of outstanding Defaulted Preferred Stock as hereinafter set
forth. The right of holders of Defaulted Preferred Stock, voting
separately as a class without regard to series, to elect members of
the Board of Directors of the Corporation as aforesaid shall continue
until such time as all dividends accumulated on Defaulted Preferred
Stock shall have been paid in full or declared and set aside for
payment in full, at which time such right immediately shall terminate
subject to revesting in the event of each and every subsequent default
of the character above mentioned.
(ii) At any time when such voting right shall have
vested in the holders of shares of Defaulted Preferred Stock entitled
to vote thereon, and if such right shall not already have been
initially exercised, an officer of the Corporation shall, upon the
written request of holders of record of 10% of the voting power
represented by the shares
15
<PAGE> 16
of such Defaulted Preferred Stock then outstanding, addressed to the
Secretary of the Corporation, call a special meeting of holders of
shares of such Default Preferred Stock. Such meeting shall be held at
the earliest practicable date upon the notice required for annual
meetings of stockholders at the place for holding annual meetings of
stockholders of the Corporation or, if none, at a place designated by
the Secretary of the Corporation. If such meeting shall not be called
by the proper officers of the Corporation within 30 days after the
personal service of such written request upon the Secretary of the
Corporation, or within 30 days after mailing the same within the
United States, by registered mail, addressed to the Secretary of the
Corporation at its principal office (such mailing to be evidenced by
the registry receipt issued by the postal authorities), then the
holders of record of 10% of the voting power represented by the shares
of Defaulted Preferred Stock than outstanding may designate in writing
any person to call such meeting at the expense of the Corporation, and
such meeting may be called by such person so designated upon the
notice required for annual meetings of stockholders and shall be held
at the same place as is elsewhere provided in this Section. Any
holder of shares of Defaulted Preferred Stock then outstanding that
would be entitled to vote at such meeting shall have access to the
stock books of the Corporation for the purpose of causing a meeting of
stockholders to be called pursuant to the provisions of this Section.
Notwithstanding the provisions of this Section, however, no such
special meeting shall be called or held during a period within 45 days
immediately preceding the date fixed for the next annual meeting of
stockholders.
(iii) So long as any shares of the Series are outstanding,
the By-laws shall contain no provisions that would restrict the
exercise, by the holders of Defaulted Preferred Stock, of the right to
elect directors under the circumstances provided in Section 8(a)(i)
above.
(iv) Directors elected pursuant to Section 8(a)(i) shall
serve until the earlier of (A) the next annual meeting of the
stockholders of the Corporation and the election (by the holders of
Defaulted Preferred Stock) and qualification of their respective
successors or (B) the date upon which all dividends in default on the
Defaulted Preferred Stock shall have been paid in full or declared and
set apart for payment. If, prior to the end of the term of any
director elected as aforesaid, a vacancy in the office of that
16
<PAGE> 17
director shall occur during the continuance of a default in dividends
on the shares of the Series or such Parity Dividend Shares by reason
of death, resignation or disability, the vacancy shall be filled for
the unexpired term by the appointment by the remaining director
elected as aforesaid of a new director for the unexpired term of the
former director.
(b) Miscellaneous. Without the affirmative vote of the
holders of at least 66 2/3% of the outstanding shares of the Series and
outstanding Parity Dividend Shares, voting as a single class (or, if less than
all shares of the Series or Parity Dividend Shares then outstanding would be
adversely affected thereby, without the affirmative vote of the holders of at
least 66 2/3% of the outstanding shares of each series so affected, voting as a
separate class), the Corporation may not:
(i) amend, alter or repeal (by merger or otherwise) any
provision of the Corporation's Certificate of Incorporation or this
Certificate or the By-laws of the Corporation so as to adversely
affect the relative rights, preferences, qualifications, limitations
or restrictions of the shares of the Series; or
(ii) effect any reclassification of the shares of the
Series.
The above notwithstanding, the Corporation's Certificate of
Incorporation may be amended (i) to increase or decrease the number of
authorized shares of Preferred Stock (but not below the number of shares
thereof then outstanding) by the affirmative vote of the holders of a majority
of the stock of the Corporation entitled to vote thereon or (ii) to authorize
any other class or series of capital stock of the Corporation, regardless of
the relative rights, preferences, qualifications, limitations or restrictions
thereof, including an amendment to increase the authorized number of shares of
Common Stock or Preferred Stock of the Corporation without the vote of the
holders of shares of the Series.
9. Mandatory Redemption. The shares of the Series are not
subject to mandatory redemption or sinking fund requirements.
10. Certain Definitions. As used in this Certificate, the
following terms shall have the following respective meanings:
"Common Shares" shall mean any stock of the Corporation which
has no preference in respect of
17
<PAGE> 18
dividends or of amounts payable in the event of any voluntary or
involuntary liquidation, dissolution or winding-up of the Corporation
and which is not subject to redemption by the Corporation. Unless the
context otherwise specifies or requires, all references in this
certificate to "Common Shares" include the Common Stock.
IN WITNESS WHEREOF, the Corporation has caused this
Certificate to be duly executed on its behalf by its undersigned duly
authorized officer this 6th day of August, 1996.
PENNCORP FINANCIAL GROUP, INC.
By:/s/ Scott D. Silverman
-------------------------------
Scott D. Silverman
Senior Vice President,
General Counsel and
Secretary
18
<PAGE> 1
EXHIBIT 5.1
WEIL, GOTSHAL & MANGES LLP
100 CRESCENT COURT
SUITE 1300
DALLAS, TEXAS 75201-6950
October 2, 1996
PennCorp Financial Group, Inc.
745 Fifth Avenue, Suite 500
New York, New York 10151
Ladies and Gentlemen:
We have acted as counsel to PennCorp Financial Group, Inc., a Delaware
corporation (the "Company"), in connection with the preparation and filing by
the Company with the Securities and Exchange Commission of a Registration
Statement on Form S-3 (the "Registration Statement"), under the Securities Act
of 1933, as amended, with respect to the offer and sale by the Selling
Securityholders named in the prospectus contained therein or in prospectus
supplements thereto of up to 2,875,000 shares (the "Convertible Preferred
Shares") of $3.50 Series II Convertible Preferred Stock, par value $.01 per
share (the "Convertible Preferred Stock"), of the Company and up to 4,118,911
shares of common stock, par value $.01 per share (the "Common Stock"), of the
Company initially issuable upon conversion of the Convertible Preferred Stock.
In so acting, we have examined originals or copies, certified or otherwise
identified to our satisfaction, of the Registration Statement, the Certificate
of Incorporation of the Company, as amended, the Certificate of Designation for
the Convertible Preferred Stock (the "Certificate of Designation") filed as an
exhibit to the Registration Statement, and such corporate records, agreements,
documents, and other instruments and such certificates or comparable documents
of public officials and of officers and representatives of the Company, and have
made such inquiries of such officers and representatives, as we have deemed
relevant and necessary as a basis for the opinions hereinafter set forth.
In such examination, we have assumed the genuineness of all signatures, the
legal capacity of natural persons, the authenticity of all documents submitted
to us as originals, the conformity to original documents of all documents
submitted to us as certified or photostatic copies and the authenticity of the
originals of such latter documents. As to all questions of fact material to this
opinion that have not been independently established, we have relied upon
certificates of officers and representatives of the Company.
Based on the foregoing, and subject to the qualifications stated herein, we
are of the opinion that:
1. The Company is a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware.
2. The Convertible Preferred Shares have been duly authorized and
validly issued and are fully paid and nonassessable.
3. The Convertible Preferred Shares are convertible at the option of
the holder thereof into shares of Common Stock in accordance with the terms
of the Certificate of Designation. The shares of Common Stock initially
issuable upon conversion of the Convertible Preferred Shares have been duly
authorized and reserved for issuance upon such conversion by all necessary
corporate action and such shares of Common Stock, when issued and
delivered, will be validly issued, fully paid and nonassessable.
The opinions expressed herein are limited to the corporate laws of the
State of Delaware and we express no opinion as to the effect on the matters
covered by this letter of the laws of any other jurisdiction.
The opinions expressed herein are rendered solely for your benefit in
connection with the transactions described herein. Those opinions may not be
used or relied upon by any other person, nor may this letter or any copies
thereof be furnished to a third party, filed with a governmental agency, quoted,
cited or otherwise referred to without our prior written consent, except that we
consent to the filing of this letter as an exhibit to the Registration
Statement. Consent is also given to the reference to our firm under the caption
"Legal Matters" in the Prospectus contained in the Registration Statement.
Very truly yours,
WEIL, GOTSHAL & MANGES LLP
<PAGE> 1
EXHIBIT 12.1
STATEMENT RE COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES AND PREFERRED
STOCK DIVIDEND REQUIREMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, 1993, 1992 AND 1991
AND FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------- ------------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- -------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Pre-tax earnings from continuing
operations...................... $22,761 $28,797 $50,724 $58,581 $ 94,995 $40,898 $67,989
Adjustments to earnings:
Fixed charges................... 25,635 20,903 9,656 20,641 23,236 11,867 12,503
Interest capitalized............
Preferred stock dividend
requirements of majority owned
subsidiaries..................
Equity in undistributed earnings
of 50% or less owned
subsidiaries.................. (910) (3,264) (8,407)
------- ------- ------- ------- -------- ------- -------
Total earnings and fixed
charges................ $48,396 $49,700 $60,380 $79,222 $117,321 $49,501 $72,085
======= ======= ======= ======= ======== ======= =======
Fixed charges:
Interest expensed............... $23,274 $16,246 $ 6,301 $17,403 $ 18,729 $ 9,719 $ 9,697
Amortization of deferred debt
cost and original issue
discount...................... 1,375 1,160 871 1,051 287 681
Rental expense.................. 2,361 3,282 2,195 2,367 3,456 1,861 2,125
------- ------- ------- ------- -------- ------- -------
Total fixed charges...... $25,635 $20,903 $ 9,656 $20,641 $ 23,236 $11,867 $12,503
======= ======= ======= ======= ======== ======= =======
Preferred stock dividend
requirements:
Preferred stock dividends....... $ 3,052 $ 2,903 $ 1,151 $ 6,540 $ 1,725 $ 5,400
Gross-up for taxes.............. 2,589 1,728 664 3,265 889 2,569
------- ------- ------- -------- ------- -------
Total preferred stock
dividend
requirements........... $ 5,641 $ 4,631 $ 1,815 $ 9,805 $ 2,614 $ 7,969
======= ======= ======= ======== ======= =======
Ratio of earnings to fixed
charges......................... 1.89x 2.38x 6.25x 3.84x 5.05x 4.17x 5.77x
======= ======= ======= ======= ======== ======= =======
Combined ratio of earnings to
fixed charges and preferred
stock dividend requirements..... 1.55x 1.95x 6.25x 3.53x 3.55x 3.42x 3.52x
======= ======= ======= ======= ======== ======= =======
</TABLE>
<PAGE> 1
EXHIBIT 15.1
The Board of Directors
PennCorp Financial Group, Inc.:
Re: Registration Statement No. 333-xxxx on Form S-3 (2,875,000 Shares of $3.50
Series II Convertible Preferred Stock, 4,118,911 Shares of Common Stock)
With respect to the subject registration statement, we acknowledge our awareness
of the use therein of our reports dated August 9, 1996 and May 8, 1996, related
to our reviews of interim financial information.
Pursuant to Rule 436(c) under the Securities Act of 1933, such reports are not
considered part of a registration statement prepared or certified by an
accountant or a report prepared or certified by an accountant within the
meanings of sections 7 and 11 of the Act.
Very truly yours,
KPMG PEAT MARWICK LLP
Raleigh, North Carolina
September 30, 1996
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
PennCorp Financial Group, Inc.:
We consent to incorporation by reference in the registration statement (No.
333-xxxx) on Form S-3 (2,875,000 Shares of $3.50 Series II Convertible Preferred
Stock, 4,118,911 Shares of Common Stock) of PennCorp Financial Group, Inc. of
our reports dated February 5, 1996 relating to the consolidated balance sheets
of PennCorp Financial Group, Inc. and subsidiaries as of December 31, 1995, and
1994, and the related consolidated statements of income, shareholders' equity,
and cash flows for each of the years in the three-year period ended December 31,
1995, and all related schedules, which reports are included in or incorporated
by reference in the 1995 Annual Report on Form 10-K of PennCorp Financial Group,
Inc. and to the reference to our firm under the heading "Experts" in the
prospectus.
Our report on the financial statements refers to the adoption of Statement of
Financial Accounting Standards No. 115 effective January 1, 1994.
KPMG PEAT MARWICK LLP
Raleigh, North Carolina
September 30, 1996
<PAGE> 1
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference into this Registration
Statement on Form S-3 of PennCorp Financial Group, Inc., of our report dated
February 29, 1996 on the consolidated balance sheets of United Companies Life
Insurance Company and its subsidiary as of December 31, 1995 and 1994, and the
related consolidated statements of income, stockholder's equity, and cash flows
for each of the three years in the period ended December 31, 1995, which report
is included in the PennCorp Financial Group, Inc. Current Report on Form 8-K
dated August 5, 1996, filed with the Securities and Exchange Commission, and to
the reference to us under the heading "Experts" in the Prospectus, which is part
of this Registration Statement.
DELOITTE & TOUCHE LLP
Baton Rouge, Louisiana
October 1, 1996
<PAGE> 1
EXHIBIT 23.4
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement
of PennCorp Financial Group, Inc. on Form S-3 of our report dated May 16, 1995
(which expresses an unqualified opinion and includes an explanatory paragraph in
relation to the company's ability to continue as a going concern), on the
consolidated balance sheets of Integon Life Corporation and subsidiaries as of
December 31, 1994 and 1993, and the related consolidated statements of
operations, stockholder's equity, and cash flows for the years ended December
31, 1994 and 1993, and for the period February 13, 1992 to December 31, 1992,
and of the Life Operations of Integon for the period January 1, 1992 to February
12, 1992, appearing in the Prospectus, which is part of the Registration
Statement No. 333-00092, as amended, which is incorporated by reference in this
Registration Statement.
DELOITTE & TOUCHE LLP
Winston-Salem, North Carolina
October 1, 1996
<PAGE> 1
EXHIBIT 23.5
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-3
(File No. 333-XXXX) of our report, which includes explanatory paragraphs
relating to the adoption of, and changes in, certain accounting principles,
dated July 9, 1996, on our audits of the combined financial statements of the
Insurance Operations of I.C.H. Corporation Acquired by Southwestern Financial
Corporation. We also consent to the reference to our firm under the caption
"Experts."
COOPERS & LYBRAND L.L.P.
Dallas, Texas
October 2, 1996
