<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
------------------------------------------------
Commission file number 1-11422
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PennCorp Financial Group, Inc.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 13-3543540
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(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
745 Fifth Avenue, New York, New York 10151
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (212) 832-0700
------------------------------
- --------------------------------------------------------------------------------
Former Name, Former Address and Former Fiscal Year, If
Changes Since Last Report
Indicate by check [x] whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days Yes [X] No[ ]
Indicate the number of shares outstanding of each of the Issuer's
common stock, as of the latest practicable date.
Class May 12, 1997
---------------------------------- -------------------------
Common Stock, $.01 Par Value 28,506,381
<PAGE> 2
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Condensed Balance Sheets -
March 31, 1997, and December 31, 1996........................................ 3
Consolidated Statements of Income -
Three Month Periods Ended March 31, 1997 and 1996............................ 4
Consolidated Condensed Statements of Cash Flows -
Three Month Periods Ended March 31, 1997 and 1996............................ 5
Notes to Unaudited Consolidated Condensed Financial Statements.................... 6
Review by Independent Certified Public Accountants................................ 11
Independent Auditors' Report...................................................... 12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..................................... 13
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings................................................................. 18
Item 6. Exhibits and Reports on Form 8-K.................................................. 19
SIGNATURE..................................................................................................... 20
Index to Exhibits............................................................................................. 21
</TABLE>
2
<PAGE> 3
PART I. -- FINANCIAL INFORMATION
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
(Unaudited)
----------- -----------
March 31, December 31,
1997 1996
----------- -----------
<S> <C> <C>
ASSETS:
Investments:
Fixed maturities:
Held for investment, at amortized cost $ 49,384 $ 87,330
Available for sale, at fair value 2,924,941 2,993,925
Equity securities available for sale, at fair value 22,647 20,867
Trading securities, at market -- 31,140
Mortgage loans on real estate 269,872 256,998
Policy loans 145,232 145,976
Short term investments 142,976 63,113
Other investments 53,002 46,848
----------- -----------
Total investments 3,608,054 3,646,197
Cash 5,386 39,464
Accrued investment income 41,546 48,643
Accounts and notes receivable 54,746 47,307
Investments in unconsolidated affiliates 134,965 144,652
Present value of insurance in force 357,337 351,973
Deferred policy acquisition costs 290,493 268,356
Costs in excess of net assets acquired 137,911 148,174
Other assets 139,177 138,967
----------- -----------
Total assets $ 4,769,615 $ 4,833,733
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Policy liabilities and accruals $ 3,507,425 $ 3,562,108
Notes payable 245,186 210,325
Income taxes, primarily deferred 54,019 65,036
Accrued expenses and other liabilities 150,663 118,401
----------- -----------
Total liabilities 3,957,293 3,955,870
----------- -----------
Mandatory redeemable preferred stock:
Series B, $.01 par value, $100 initial redemption value; authorized, issued and outstanding -0- -- 14,689
at March 31, 1997, and 127,500 at December 31, 1996
Series C, $.01 par value, $100 initial redemption value; authorized,
issued and outstanding 178,500 at March 31, 1997, and December 31, 1996 18,584 18,175
Shareholders' Equity:
$3.375 Convertible Preferred Stock, $.01 par value, $50 redemption value; authorized issued and
outstanding 2,300,000 at March 31, 1997, and December 31, 1996 110,513 110,513
$3.50 Series II Convertible Preferred Stock, $.01 par value, $50 redemption value; authorized
issued and outstanding 2,875,000 at March 31, 1997, and December 31, 1996 139,157 139,157
Common stock, $.01 par value; authorized 50,000,000; issued and outstanding 28,766,055 at
March 31, 1997, and 28,647,714 at December 31, 1996 288 286
Additional paid-in capital 394,020 393,156
Unrealized foreign currency translation losses (16,787) (14,969)
Unrealized gains (losses) on securities available for sale (34,727) 19,582
Retained earnings 209,681 202,144
Treasury shares (6,907) (3,370)
Notes receivable secured by common stock (1,500) (1,500)
----------- -----------
793,738 844,999
----------- -----------
$ 4,769,615 $ 4,833,733
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
3
<PAGE> 4
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------- -----------
1997 1996
----------- -----------
<S> <C> <C>
REVENUES:
Premiums, principally accident and sickness $ 66,477 $ 64,421
Interest sensitive product policy charges 23,226 22,669
Net investment income 68,894 41,297
Other income 6,040 --
Net gains (losses) from sale of investments 3,827 (527)
----------- -----------
Total revenues 168,464 127,860
----------- -----------
BENEFITS AND EXPENSES:
Claims incurred 44,655 44,326
Change in liability for future policy benefits and
other policy benefits 29,706 11,490
Amortization of present value of insurance in force
and deferred policy acquisition costs 19,369 14,859
Amortization of costs in excess of net assets
acquired 2,064 2,030
Underwriting and other administrative expenses 30,849 23,632
Interest and amortization of deferred debt issuance costs 4,387 6,057
Restructuring charge 19,071 --
----------- -----------
Total benefits and expenses 150,101 102,394
----------- -----------
Income before income taxes, undistributed earnings in 18,363 25,466
unconsolidated affiliates and extraordinary charge
Income taxes 8,217 9,630
----------- -----------
Net income before undistributed earnings in unconsolidated 10,146 15,836
affiliates and extraordinary charge
Undistributed earnings in unconsolidated affiliates 3,741 4,318
----------- -----------
Net income before extraordinary charge 13,887 20,154
Extraordinary charge -- (816)
----------- -----------
Net income 13,887 19,338
Preferred stock dividend requirements 4,927 2,691
----------- -----------
Net income applicable to common stock $ 8,960 $ 16,647
=========== ===========
PER SHARE INFORMATION:
Primary:
Net income applicable to common stock before extraordinary charge $ 0.30 $ 0.69
Extraordinary charge, net of income taxes -- (0.03)
----------- -----------
Net income applicable to common stock $ 0.30 0.66
=========== ===========
Common shares used in computing primary earnings per share 29,703 25,483
=========== ===========
Fully diluted:
Net income applicable to common stock before extraordinary charge $ 0.30 $ 0.63
Extraordinary charge, net of income taxes -- (0.03)
----------- -----------
Net income applicable to common stock $ 0.30 $ 0.60
=========== ===========
Common shares used in computing fully diluted earnings per share 29,703 30,593
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
4
<PAGE> 5
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
-------------------------
THREE MONTHS ENDED
MARCH 31,
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
Net cash provided by operating activities $ 88,907 $ 8,208
----------- -----------
Cash flows from investing activities:
Purchases of invested assets (327,134) (426,683)
Sales of invested assets 302,420 246,015
Maturities of invested assets 47,474 39,495
Other, primarily short term investments, net (89,068) 127,764
----------- -----------
Net cash used by investing activities (66,308) (13,409)
----------- -----------
Cash flows from financing activities:
Issuance of common stock 866 155,759
Treasury stock purchase (3,538) --
Additional borrowings 135,000 --
Reduction in notes payable (100,139) (137,000)
Redemption of preferred stock (14,706) --
Dividends on preferred and common stock (5,879) (3,332)
Receipts from interest sensitive policies credited to policyholder account
balances 51,380 27,644
Return of policyholder account balances on interest sensitive products (116,787) (42,378)
Other, net (2,874) --
----------- -----------
Net cash provided (used) by financing activities (56,677) 693
----------- -----------
Decrease in cash (34,078) (4,508)
Cash at beginning of period 39,464 27,778
----------- -----------
Cash at end of period $ 5,386 $ 23,270
=========== ===========
Supplemental disclosures:
Income taxes paid $ 1,820 $ 829
=========== ===========
Interest paid $ 2,275 $ 2,757
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED CONDENSED FNANCIAL STATEMENTS.
5
<PAGE> 6
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
PennCorp Financial Group, Inc. (the "Company", "PennCorp") is an
insurance holding company. The Company commenced operations with the acquisition
of Pennsylvania Life Insurance Company ("PLIC") and Executive Fund Life
Insurance Company (which was merged into PLIC effective July 1, 1996) and
Pacific Life and Accident Insurance Company ("PLAIC") on August 23, 1990.
Through its wholly-owned life insurance subsidiaries, PLIC and its wholly-owned
subsidiary, PennCorp Life Insurance Company (collectively referred to as "Penn
Life"), Peninsular Life Insurance Company ("Peninsular"), Professional Insurance
Corporation ("Professional"), Pioneer Security Life Insurance Company ("Pioneer
Security") and its wholly-owned subsidiaries American-Amicable Life Insurance
Company of Texas and Pioneer American Insurance Company (Pioneer Security and
its subsidiaries collectively referred to as "AA Life"), Salem Life Insurance
Corporation ("Salem Life") and its wholly-owned subsidiaries Integon Life
Insurance Corporation ("ILIC") and Georgia International Life Insurance Company
and Occidental Life Insurance Company of North Carolina ("OLIC") (Salem Life and
its wholly-owned subsidiaries collectively referred to as "Integon Life"),
United Life and Annuity Insurance Company ("UC Life"), and PLAIC, the Company
offers a broad range of accident and sickness, life, and accumulation insurance
products to individuals through a sales force that is contractually exclusive to
certain of the Company's subsidiaries and through general agents.
The accompanying consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated. All dollar amounts
presented hereafter, except share information, are stated in thousands.
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 the Company deems to be acutely sensitive to changes in estimates include
deferred policy acquisition costs, future policy benefits, policy and contract
claims and present value of insurance in force. In addition, the Company must
determine requirements for disclosure of contingent assets and liabilities as
of the date of the financial statements based upon estimates. In all instances,
actual results could differ from estimates.
6
<PAGE> 7
(2) PENDING MERGER, ACQUISITION, AND RELATED TRANSACTIONS
The Company, pending final review by the Securities and Exchange Commission
("SEC") of the Joint Proxy Statement and Prospectus will be soliciting
shareholder approval for the following transactions: (i) the merger of the
Company and Washington National Corporation, (ii) the acquisition of the
Controlling Interest in Southwestern Financial Corporation and Subsidiaries,
(iii) the acquisition of the Fickes and Stone Knightsbridge Interests, and (iv)
other items.
Under the terms of the restated merger agreement, Washington National
Corporation shareholders will receive the right to receive $29.50 per share of
consideration in the form of cash, PennCorp Common Stock, or a combination of
cash and PennCorp Common Stock. The aggregate consideration to be received by
the Washington National Corporation shareholders will be approximately
$377,000, of which $100,000 with the right by PennCorp to increase the portion
of the purchase price consideration to a maximum of 45% of the transaction
value, will be subject to cash elections.
PennCorp will receive its right to acquire the Controlling Interest in
Southwestern Financial Corporation and Subsidiaries through the assignment by
Fickes and Stone and Knightsbridge ("the Controlling Parties") of certain
rights including common stock and common stock equivalents of Southwestern
Financial Corporation and Subsidiaries. The Controlling Parties will
receive aggregate cash consideration ranging from $67,500 to $69,600
(not including expenses) depending upon the outcome of certain contingencies.
In addition, PennCorp has proposed to acquire the Fickes and Stone
Knightsbridge Interests for total consideration in the form of estimated annual
payments of $330 due April 15, 1997, each year through 2001 and the issuance
by PennCorp of 173,160 shares of PennCorp Common Stock to each of Fickes and
Stone on April 15, 2001.
It is anticipated that PennCorp common shareholders will vote on the above
transactions in July 1997, and, subject to shareholder approval, the Company
intends to consummate such transactions as expeditiously as possible.
7
<PAGE> 8
(3) SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
Through its direct investment in Southwestern Financial Corporation
and Subsidiaries, the Company beneficially owns 74.8% of the economic interest
in Southwestern Financial Corporation and Subsidiaries.
Financial information for Southwestern Financial Corporation and
Subsidiaries is provided below.
CONSOLIDATED CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31, 1997 DECEMBER 31, 1996
-------------- -----------------
(unaudited)
<S> <C> <C>
ASSETS:
Invested assets $ 1,598,926 $ 1,640,991
Insurance assets 359,671 107,230
Other assets 208,418 462,329
------------- -------------
Total assets $ 2,167,015 $ 2,210,550
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Policy liabilities $ 1,734,438 $ 1,745,160
Long-term debt 158,500 159,750
Other liabilities 109,175 127,237
Mandatory redeemable preferred stock 34,607 33,879
Shareholders' equity 130,295 144,524
------------- -------------
Total liabilities and shareholders' equity $ 2,167,015 $ 2,210,550
============= =============
</TABLE>
CONSOLIDATED CONDENSED STATEMENT OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------
MARCH 31, 1997 MARCH 31, 1996
-------------- --------------
<S> <C> <C>
REVENUES:
Policy revenues $ 37,500 $ 62,708
Net investment income 32,097 33,020
Net gains from sale of investments 15 511
Other income 6,184 3,664
------------- -------------
Total revenues 75,796 99,903
------------- -------------
BENEFITS AND EXPENSES:
Policyholder benefits 45,282 64,930
Amortization 6,047 6,039
Underwriting and other administrative expenses 11,578 15,107
Interest and related debt costs 3,436 3,575
------------- -------------
Total benefits and expenses 66,343 89,651
------------- -------------
Income before income taxes 9,453 10,252
Income tax expense 3,724 3,812
------------- -------------
Net income 5,729 6,440
Preferred stock dividend requirements 728 667
------------- -------------
Net income applicable to common stockholders $ 5,001 $ 5,773
============= =============
</TABLE>
8
<PAGE> 9
(4) RESTRUCTURING CHARGES
In the third quarter of 1996, the Company initiated a strategic business
evaluation designed to realign the underlying business units into five
operating divisions: Career Sales, Individual Sales, Financial Services,
Payroll Sales, and Other Insurance.
The evaluation considered each of the current operating companies, including the
anticipated merger of the Company and Washington National Corporation and the
purchase of the Controlling Interest in Southwestern Financial Corporation and
Subsidiaries, and (a) their impact on the Company's current and long-term
profitability potential, (b) the ability to absorb operations related to future
acquisitions, and (c) market focus.
As a result of this effort, at the end of the first quarter of 1997 management
authorized and committed the Company to implement the new divisional
structure, including the closure of all foreign operations except for Canada,
and recorded a cumulative pre-tax restructuring charge of $19,071. It is
probable that the final determination of the pending merger of the Company and
Washington National Corporation and the purchase of the Controlling Interest in
Southwestern Financial Corporation and Subsidiaries will result in certain
additional charges which cannot be definitively determined at this time.
The restructuring charge recognizes: (a) severance and related benefits incurred
due to staff reductions ($5,355), (b) estimated holding costs of vacated
facilities ($6,166), (c) the write-off of certain fixed assets and other
impaired assets ($1,526), (d) estimated contract termination costs ($23), and
(e) the Company's investment in certain foreign operations which will be
closed ($6,001). As of March 31, 1997, $346 of severance and related benefits
has been charged against these restructuring accruals.
The Company estimates approximately $1,981 of pre-tax incremental costs
associated with the restructuring were incurred during the three months ended
March 31, 1997, and estimates an additional $3,300 will be incurred through
March 31, 1998. These incremental costs will benefit future operations and do
not qualify for accrual. Examples of these incremental costs include employee
travel, relocation and training, and the physical move of fixed assets.
9
<PAGE> 10
(5) REDEMPTION OF PREFERRED STOCK AND CERTAIN EQUITY TRANSACTIONS
On March 15, 1997, the Company redeemed all of the previously
outstanding Series B Mandatory redeemable preferred stock at its stated
redemption value of $14,705. During the period certain employees and agents
exercised stock options and warrants resulting in the issuance of 118,341
shares of the Company's Common Stock. The result of such exercises was to
increase common stock and additional paid in capital by $2 and $864,
respectively. On January 11, 1997, the Company repurchased 100,000 shares for an
aggregate purchase price of $35.38 per share resulting in a $3,538 increase in
the value of treasury stock held.
(6) NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No.
128"). SFAS No. 128 supersedes and simplifies the existing computation,
presentation and disclosure requirements for earnings per share outlined under
Accounting Principles Board Opinion No. 15, "Earnings Per Share". Under the new
methodology, "basic" earnings per share will replace "primary" earnings per
share and will exclude the dilutive effect of common stock equivalents. SFAS No.
128 also revises the calculation of "fully diluted" earnings per share with
"diluted" earnings per share. This change is not anticipated to have a material
impact on reported fully diluted earnings per share calculated under the
Company's current capital structure.
SFAS No. 128 is effective for both interim and annual financial
statements issued after December 15, 1997. At that time, the Company will be
required to change the method currently used to compute earnings per share and
restate all prior periods presented. Earlier application is not permitted,
however disclosure of pro forma earnings per share amounts computed utilizing
the standards established by SFAS No. 128 is permitted in the notes to the
financial statements for periods ending prior to the effective date. Pro forma
earnings per share for the three month periods ended March 31, 1997 and 1996,
are as follows:
<TABLE>
<CAPTION>
March 31, 1997 March 31, 1996
-------------- --------------
<S> <C> <C>
Basic $0.32 $0.72
Diluted $0.30 $0.60
</TABLE>
In March 1997, the FASB issued Financial Accounting Standards No. 129,
"Disclosures of Information About Capital Structure" ("SFAS No. 129"). SFAS No.
129 is effective for both interim and annual financial statements issued after
December 15, 1997, and clarifies the disclosure requirements related to the
type, and nature, of securities contained within the Company's capital
structure.
10
<PAGE> 11
REVIEW BY INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The March 31, 1997 and 1996, financial statements included in this filing
have been reviewed by KPMG Peat Marwick L.L.P., independent certified public
accountants, in accordance with established professional standards and
procedures for such a review.
The report of KPMG Peat Marwick L.L.P commenting upon their review is
included on page 12.
[REST OF PAGE INTENTIONALLY LEFT BLANK]
11
<PAGE> 12
Independent Auditors' Review Report
The Board of Directors and Shareholders
PennCorp Financial Group, Inc.
We have reviewed the accompanying consolidated condensed balance sheet
of PennCorp Financial Group, Inc. and subsidiaries as of March 31, 1997, and
the related consolidated statements of income and consolidated condensed
statements of cash flows for the three-month periods ended March 31, 1997 and
1996. These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by
the American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications
that should be made to the financial statements referred to above for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of PennCorp Financial Group,
Inc. as of December 31, 1996, and the related consolidated statements of income,
shareholders' equity, and cash flows for the year then ended (not presented
herein); and in our report dated February 28, 1997, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
financial information set forth in the accompanying consolidated condensed
balance sheet as of December 31, 1996 is fairly presented, in all material
respects, in relation to the consolidated balance sheet from which it has been
derived.
/s/ KPMG PEAT MARWICK LLP
May 15, 1997
Raleigh, North Carolina
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This "Management's Discussion and Analysis of Financial Condition and
Results of Operations" should be read in conjunction with the comparable
discussion filed with the Company's annual filing with the Securities and
Exchange Commission on Form 10-K/A for the fiscal year ended December 31, 1996.
The following discussion should be read in conjunction with the
unaudited consolidated condensed financial statements and related notes of this
Quarterly Report on Form 10-Q.
Cautionary Statement for purposes of the Safe Harbor Provisions of the
Private Securities Litigation Reform Act of 1995. The statements below that
relate to future plans, events or performances are forward-looking statements
that involve a number of risks or uncertainties. Among those items that could
adversely affect the Company's financial condition, results of operations and
cash flows are the following: changes in regulations affecting insurance
companies, interest rates, the federal income tax code (to the extent the
Company's product mix includes tax deferred accumulation products), the ratings
assigned to the Company's insurance subsidiaries by independent rating
organizations such as A.M. Best (which the Company believes are particularly
important to the sale of annuity and other accumulation products) and
unanticipated litigation. There can be no assurance that other factors not
currently anticipated by management will not also materially and adversely
affect the Company's results of operations.
GENERAL
PennCorp Financial Group, Inc. (the "Company", "PennCorp"), through its
operating subsidiaries, is a low cost provider of accumulation, life, and fixed
benefit accident and sickness insurance products throughout the United States
and Canada. The Company's products are sold through several distribution
channels, including exclusive agents, general agents, financial institutions,
and payroll deduction programs, and are targeted primarily to lower and
middle-income individuals in rural and suburban areas. These products are
primarily small premium accident and sickness insurance policies with defined
fixed benefit amounts, traditional whole life and universal life insurance with
low face amounts and accumulation products such as single premium deferred
annuities.
The Company's financial condition and results of operations for the
periods covered by this and future "Management's Discussion and Analysis of
Financial Condition and Results of Operations" are or will be affected by
several common factors, each of which is discussed below.
Restructuring Charges. As a result of the tremendous growth the Company
has experienced, the diversification of the underlying business units resulting
from acquisitions over time and the need for the Company to be able to rapidly
integrate future acquisitions, the Company began a strategic business
evaluation during the third quarter of 1996. During the period ended March 31,
1997, the Company completed its review of the existing business units and
commenced a plan to fully establish five operating divisions: Career Sales,
Individual Sales, Financial Services, Payroll Sales, and Other Insurance. The
Company thoughtfully considered the impact the pending merger with Washington
National Corporation and the acquisition of the Controlling Interest in
Southwestern Financial Corporation and Subsidiaries may have on the divisional
structure. However, certain portions of the Company's restructuring plan will
not be definitive until the consummation of the pending merger, acquisition and
related transactions. As a result, it is probable that this Company may incur
certain additional restructuring charges as the final determination of the time
of consummation of the merger with Washington National Corporation and the
acquisition of the Controlling Interest in Southwestern Financial Corporation
and Subsidiaries are known.
During the first quarter of 1997 management authorized and committed the
Company to implement the new divisional structure, including the closure
of all foreign operations except for Canada. As a result the Company recorded a
cumulative pre-tax restructuring charge of $19,071.
The restructuring charge recognizes: (a) severance and related benefits
incurred due to staff reductions ($5,355), (b) estimated holding costs of
vacated facilities ($6,166), (c) the write-off of certain fixed assets and other
impaired assets ($1,526), (d) estimated contract termination costs ($23), and
(e) the Company's investment in certain foreign operations which will be closed
($6,001). As of March 31, 1997, $346 of severance and related benefits has been
charged against these restructuring accruals.
13
<PAGE> 14
The Company estimates approximately $1,981 of pre-tax incremental costs
associated with the restructuring were incurred during the three months ended
March 31, 1997, and estimates an additional $3,300 will be incurred through
March 31, 1998. These incremental costs will benefit future operations and do
not qualify for accrual. Examples of these incremental costs include employee
travel, relocation and training, and the physical move of fixed assets.
For the period ended March 31, 1997, the following table eliminates from
the reported results of the Company the related impact of the restructuring
charges which the Company believes to be material in order to improve the
comparability of such information.
<TABLE>
<CAPTION>
Three months ended Three months ended
March 31, 1997 March 31, 1996
-------------------------------------- ------------------
Restructuring As Reported
As Reported Costs (net) As Reported
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
OPERATING INFORMATION:
Total revenues $168,464 $168,464 $127,860
Benefits and expenses
Claims incurred 44,655 44,655 44,326
Change in liability for future policy benefits and other
policy benefits 29,706 29,706 11,490
Amortization of present value of insurance in force
and deferred policy acquisition costs 19,369 19,369 14,859
Amortization of costs in excess of net assets acquired 2,064 2,064 2,030
Underwriting and other administrative expenses 30,849 1,981 28,868 23,632
Interest and amortization of deferred debt issuance costs 4,387 4,387 6,057
Restructuring charge 19,071 19,071 - -
-------- -------- --------
Total benefits and expenses 150,101 129,049 102,394
-------- -------- --------
Income before income taxes, undistributed earnings in unconsolidated
affiliates and extraordinary charge 18,363 39,415 25,466
Income tax expense 8,217 14,518 9,630
-------- -------- --------
Net income before undistributed earnings in unconsolidated affiliates
and extraordinary charge 10,146 24,897 15,836
Undistributed earnings in unconsolidated affiliates 3,741 3,741 4,318
-------- -------- --------
Net income before extraordinary charge 13,887 28,638 20,154
Extraordinary charge, net of income taxes - - (816)
-------- -------- --------
Net income 13,887 28,638 19,338
Preferred stock dividend requirements 4,927 4,927 2,691
-------- -------- --------
Net income applicable to common stock $8,960 $23,711 $16,647
======== ======== ========
</TABLE>
14
<PAGE> 15
Pending Merger, Acquisition and Related Transactions. On January 22,
1997, the Company filed with the Securities and Exchange Commission ("SEC"), a
preliminary PennCorp Financial Group, Inc. and Washington National Corporation
Joint Proxy Statement and Prospectus ("Joint Proxy Statement") in which the
Company, pending final review by the SEC, will be soliciting shareholder
approval for the following transactions: (i) the merger with Washington
National Corporation, (ii) the acquisition of the Controlling Interest in
Southwestern Financial Corporation and Subsidiaries, (iii) the acquisition of
the Fickes and Stone Knightsbridge Interests, and (iv) other items.
The merger with Washington National Corporation and the acquisition of
the Controlling Interest in Southwestern Financial Corporation and Subsidiaries
will expand the Company's individual and payroll sales division operations with
similar products, distribution channels and asset mixes.
The Company anticipates, pending regulatory and shareholder approval,
consummating the merger with Washington National Corporation, the acquisition of
the Controlling Interest in Southwestern Financial Corporation and Subsidiaries,
and the acquisition of the Fickes and Stone Knightsbridge Interests in July
1997.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements are funded primarily by its
insurance subsidiaries. The insurance subsidiaries' principal sources of cash
are premiums and investment income. The insurance subsidiaries' primary uses of
cash are policy claims, commissions, operating expenses, income taxes and
payments to the Company for principal and interest due under surplus
debentures, tax sharing payments and dividends. Both sources and uses of cash
are reasonably predictable.
During the three month period ended March 31, 1997 the Company received
$2.7 million in interest payments or dividends from its subsidiary and paid
$4.6 million and $1.4 million in interest on preferred stock and common stock
dividends respectively. The Company utilized funds available under its
revolving credit facility to fund the shortfall. For periods beginning in 1998,
under current statutory limitations, the Company believes that it will receive
sufficient cash flow from the surplus Note Companies and their respective
subsidiaries to satisfy its cash requirements. As a result of the Company's
decision to retain capital and surplus at the insurance subsidiary level, and
with the contemplated realignment of the insurance subsidiaries into operating
divisions, the Company believes that its insurance subsidiaries have excess
capital and surplus. The Company's own established targets for estimated
risk-based capital requirements indicate that the insurance divisions could
make available approximately $50.0 to $60.0 million to PennCorp, subject to
applicable regulatory approvals.
During the three months ended March 31, 1997, cash provided by operations was
$88.9 million compared to cash provided by operations of $8.2 million for the
three-month period ended March 31, 1996. UC Life provided $26.4 million,
consisting primarily of investment income. When including interest sensitive
products cash flows for both periods and excluding the effect of UC Life, cash
used by operations was $2.9 million for the three month period ended March
31, 1997 compared to cash used by operations of $6.5 million for the three month
period ended March 31, 1996. The improvement in cash flows from operations
resulted primarily from improvements at Integon Life.
15
<PAGE> 16
RESULTS OF OPERATIONS
Policy Revenue. Total policy revenue for the three months ended March
31, 1997, increased 3% to $89.7 million from $87.1 million for the
comparable period ended March 31, 1996, as the Company continues to focus on
balancing life policy revenues with those of fixed benefit products.
Net Investment Income. Net investment income for the three months ended
March 31, 1997 was $68.9 million compared to $41.3 million for the three months
ended March 31, 1996. Of the $27.6 million increase in investment income, $28.0
million of the increase was attributable to the addition of UC Life.
Other Income. Included in other income for the three-month
period ended March 31, 1997 are revenues derived from the Companies
non-insurance subsidiaries, primarily Marketing One, whose results were
consolidated with those of the Company beginning October 1, 1996. For the
three-month period ended March 31, 1996 included in other income were losses
aggregating $500,000 as a result of the Company's investment trading
activities.
16
<PAGE> 17
Claims Incurred. Claims incurred for the three months ended March 31,
1997 increased slightly to $44.7 million from $44.3 million for the three-month
period ended March 31, 1996. The increase in claims incurred is attributable to
$2.0 million of claims from UC Life. In addition to UC Life, other claims
incurred increases resulted from a modest deterioration in fixed benefit
product claims for Penn Life and OLIC resulting in $2.6 million increase.
Offsetting such increase were declines for its life insurance lines of
business of $4.2 million. The Company considers such minor deviations between
periods to be normal.
Underwriting and Other Administrative Expenses. For the three-month
period ended March 31, 1997, underwriting and other administrative expenses
increased 22.2% to $28.9 million from $23.6 million for the three months ended
March 31, 1996. The increase is primarily attributable to the inclusion of $7.7
million of expenses from UC Life and Marketing One. Expenses for all other
operating subsidiaries combined dropped $2.4 million as the result of an expense
base that was nearly unchanged despite the resulting efforts of the Company.
Interest and Related Debt Costs. For the three-month period ended March
31, 1997, interest and amortization of deferred debt issuance costs declined to
$4.4 million from $6.1 million for the comparable 1996 period. This decline was
the result of the repayment of $100.0 million of bridge financing and $37.0
million of subsidiary debt financing in March, 1996 from proceeds from the
Company's February, 1996 Common Stock offering. Weighted average indebtedness
outstanding for the three-month period ended March 31, 1997 was approximately
$34.0 million less at an interest cost that was approximately 150 basis points
less than the comparable 1996 period. The Company has utilized its less costly
revolving bank credit facility to repurchase approximately $38 million of Senior
Subordinated Notes, resulting in a 220 basis point arbitrage.
Income Taxes. The effective tax rate for the three months ended March
31, 1997 was 44.7% compared to 37.8% for the three months ended March 31, 1996.
Excluding the impact of $19.1 million in restructuring charges, which derive
tax benefits totalling $4.6 million, the Company's effective tax rate would
have been 36.8% for the three months ended March 31, 1997. The modest decline
in the adjusted effective tax rate of 36.8% is less than the comparable prior
period as the result of less foreign source income, which is taxed at a higher
statutory rate, to the Company's total pre-tax income.
[REST OF PAGE INTENTIONALLY LEFT BLANK]
17
<PAGE> 18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In January 1996, stockholder derivative lawsuits styled Tozour Energy
Systems Retirement Plan v. David J. Stone et al, and the PennCorp Financial
Group, Inc., C.A. No. 14775 (the "Tozour Case") and Lois Miller v. David J.
Stone et al, and the PennCorp Financial Group, Inc., C.A. No 14795 (the "Miller
Complaint") were filed against the Company and each of its directors,
individually, in the Delaware Court of Chancery. The complaint in the Miller
it has not yet been served on the Company or the other defendants. Both suits
allege that the Southwestern Financial Corporation and Subsidiaries investment
involved the usurpation of a corporate opportunity and a waste of the Company's
assets by Messrs. Stone and Fickes, and that the directors of the Company in
approving that transaction, failed to act in good faith and breached their
fiduciary duties, including the duty of loyalty to the Company and its
stockholders, having favored the interests of Messrs. Stone and Fickes over the
Company and its stockholders. These lawsuits seek judgments against each of the
defendants for the amount of damages sustained, or to be sustained, by the
company as a result of the breaches of fiduciary duty alleged in the
complaint, the imposition of a constructive trust for the benefit of the Company
on profits or benefits obtained by any defendant through the alleged breaches of
fiduciary duty, attorney's fees and costs, and such other relief as the court
determines to be just, proper or equitable.
The defendants in the Tozour Case have filed a motion seeking its
dismissal on the ground that the plaintiff failed to comply with the
requirements of Delaware law before instituting a derivative suit and intend to
defend the lawsuit vigorously. Because the Company has not been served with the
Miller complaint, no action has been taken in that case, although the Company
would also defend it vigorously. The defendants believe, however, that it would
not be in the best interests of the Company and its shareholders to expend
considerable management and director time and to incur substantial expenses to
litigate the actions. Consequently, the Company's legal advisors have met or
spoken by telephone with the plaintiffs' counsel on several occasions to
discuss the terms of a potential settlement.
The defendants and the plaintiffs' counsel entered into a Stipulation
and Agreement of Compromise and Settlement dated March 28, 1997 (the "Proposed
Settlement") of the shareholder derivative actions. The Proposed Settlement
consists of the following principal elements: (i) Messrs. Stone and Fickes will
cancel the 335,564 in Southwestern Financial Corporation and Subsidiaries common
stock warrants they hold for no consideration enabling the Company to purchase
the Controlling Interest in Southwestern Financial Corporation and Subsidiaries
for $67.5 million, reducing the price to be paid by the Company for the
Controlling Interest in Southwestern Financial corporation and Subsidiaries by
approximately $2.0 million, (ii) the Company's Board of Directors will proceed
with the purchase of The Fickes and Stone Knightsbridge Interests, having
received a fairness opinion of a nationally recognized investment banking firm
with respect to the price to be paid for The Fickes and Stone Knightsbridge
Interest, (iii) the Company's Board of Directors will proceed with the
acquisition of the Controlling Interest in Southwestern Financial Corporation
and Subsidiaries having received a fairness opinion of a nationally recognized
investment banking firm with respect to the price to be paid for the Controlling
Interest in Southwestern Financial Corporation and Subsidiaries; (iv) the
Company's Board of Directors will submit the purchase of the Fickes and Stone
Knightsbridge Interests and the Controlling Interest in Southwestern Financial
Corporation and Subsidiaries to a vote of a majority of the Company's
stockholders present at the Stockholders meeting and entitled to vote, and
stockholders must approve both transactions, (v) Messrs. Stone and Fickes will
abstain from voting on the proposals to approve the purchase of The Fickes and
Stone Knightsbridge Interests and the Controlling Interest in Southwestern
Financial Corporation and Subsidiaries and (vi) the plaintiffs' counsel will be
entitled to conduct confirmatory discovery.
Certain other lawsuits have been brought against the Company's life
insurance and non-life subsidiaries in the normal course of business involving
the settlement of various matters seeking compensatory and in some cases
punitive damages. Management believes that the ultimate settlement of all such
litigation will not have a materially adverse effect on the Company's
consolidated financial position or results of operations.
18
<PAGE> 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Numbers
-------
11.1 Computation of earning per share
15.1 Independent Auditors' Report *
27 Financial Data Schedule
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the quarter ended March 31,
1997.
* Such exhibit is incorporated by reference to page 10 of this
Form 10-Q.
[REST OF PAGE INTENTIONALLY LEFT BLANK]
19
<PAGE> 20
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PennCorp Financial Group, Inc.
--------------------------------------------
(The Registrant)
Date: May 15, 1997 By:/s/ Steven W. Fickes
--------------------------------------------
Steven W. Fickes
President and Chief Financial Officer
(Authorized officer and principal accounting
and financial officer of the Registrant)
20
<PAGE> 21
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Numbers
-------
<S> <C>
11.1 Computation of earning per share
15.1 Independent Auditors' Report *
27 Financial Data Schedule
</TABLE>
* Such exhibit is incorporated by reference to page 12 of this Form
10-Q.
<PAGE> 1
EXHIBIT 11.1
COMPUTATION OF EARNINGS PER SHARE
(Amount in Thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1997 1996
-------- --------
<S> <C> <C>
Primary:
Shares outstanding beginning of period 28,648 22,880
Issuance of 5,131 shares on March 5, 1996 -- 1,466
Incremental shares attributable to:
Warrants issued pursuant to August 1990
employment agreement 516 496
Options granted pursuant to the Company's
Stock Option Plans 242 312
Warrants issued pursuant to a Senior Management
Stock Warrant Plan 576 519
Other 1 --
Treasury Shares (280) (190)
------ ------
29,703 25,483
====== ======
Fully diluted:
Shares outstanding beginning of period 28,648 22,880
Issuance of 5,131 shares March 5, 1996 -- 1,466
Incremental shares attributable to:
Warrants issued pursuant to August 1990
employment agreement 516 498
Options granted pursuant to the Company's
Stock Option Plan 242 314
Warrants issued pursuant to a Senior Management
Stock Warrant Plan 576 537
Other 1 --
Treasury shares (280) (190)
Conversion of 2,300 shares of Series I Preferred
Stock at a rate of 2.2123 common shares to
1 preferred share -- 5,088
Conversion of 2,875 shares of Series II Preferred
Stock at a rate of 1.4327 common shares to
1 preferred share -- --
------ ------
29,703 30,593
====== ======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<DEBT-HELD-FOR-SALE> 2,924,941
<DEBT-CARRYING-VALUE> 49,384
<DEBT-MARKET-VALUE> 49,384
<EQUITIES> 22,647
<MORTGAGE> 261,372
<REAL-ESTATE> 24,049
<TOTAL-INVEST> 3,599,554
<CASH> 19,154
<RECOVER-REINSURE> 65,809
<DEFERRED-ACQUISITION> 290,493
<TOTAL-ASSETS> 4,783,383
<POLICY-LOSSES> 3,380,880
<UNEARNED-PREMIUMS> 15,005
<POLICY-OTHER> 38,504
<POLICY-HOLDER-FUNDS> 38,689
<NOTES-PAYABLE> 245,186
18,630
249,670
<COMMON> 288
<OTHER-SE> 543,780
<TOTAL-LIABILITY-AND-EQUITY> 4,783,733
89,703
<INVESTMENT-INCOME> 68,894
<INVESTMENT-GAINS> 3,827
<OTHER-INCOME> 6,040
<BENEFITS> 74,361
<UNDERWRITING-AMORTIZATION> 21,433
<UNDERWRITING-OTHER> 54,307
<INCOME-PRETAX> 18,363
<INCOME-TAX> 8,217
<INCOME-CONTINUING> 13,887
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,960
<EPS-PRIMARY> 0.30
<EPS-DILUTED> 0.30
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
