<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 September 30, 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
- --------------------------------------------------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
745 Fifth Avenue, New York, New York 10151
- --------------------------------------------------------------------------------
(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 As of November 12, 1997
- ---------------------------------- --------------------------------
Common Stock, $.01 Par Value 28,860,206
<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 -
September 30, 1997 and December 31, 1996 3
Consolidated Condensed Statements of Income -
Three Month and Nine Month Periods Ended
September 30, 1997 and 1996 4
Consolidated Condensed Statements of Cash Flows -
Nine Month Periods Ended September 30, 1997 and 1996 5
Notes to Unaudited Consolidated Condensed Financial Statements 6
Review by Independent Certified Public Accountants 13
Independent Auditors' Review Report 14
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings 25
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 26
SIGNATURE 27
INDEX TO EXHIBITS 28
</TABLE>
<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) (AS RESTATED)
-------------- ---------------
SEPTEMBER 30, DECEMBER 31,
1997 1996
-------------- ---------------
<S> <C> <C>
ASSETS:
Investments:
Fixed maturities:
Held for investment, at amortized cost $ -- $ 87,330
Available for sale, at fair value 3,022,894 2,993,925
Equity securities available for sale, at fair value 13,268 20,867
Trading securities, at fair value -- 31,140
Mortgage loans on real estate 245,175 264,732
Policy loans 144,849 145,976
Short-term investments 88,716 63,113
Other investments 114,736 48,062
---------- ----------
Total investments 3,629,638 3,655,145
Cash 20,320 39,464
Accrued investment income 43,775 48,360
Accounts and notes receivable 62,297 47,295
Investment in unconsolidated affiliate 170,120 140,526
Present value of insurance in force 292,241 339,010
Deferred policy acquisition costs 298,744 252,428
Costs in excess of net assets acquired 139,689 148,080
Other assets 162,839 139,015
---------- ----------
Total assets $4,819,663 $4,809,323
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Policy liabilities and accruals $3,353,135 $3,566,455
Notes payable 349,902 210,325
Income taxes, primarily deferred 86,536 55,840
Other liabilities 139,893 114,462
---------- ----------
Total liabilities 3,929,466 3,947,082
---------- ----------
Mandatory redeemable preferred stock:
Series B, $.01 par value, $100 initial redemption value;
authorized, issued and outstanding -0- at September 30, 1997,
and 127,500 at December 31, 1996 -- 14,689
Series C, $.01 par value, $100 initial redemption value;
authorized, issued and outstanding 178,500 at September 30,
1997, and December 31, 1996 19,430 18,175
Shareholders' Equity:
$3.375 Convertible Preferred Stock, $.01 par value, $50
Redemption value; authorized issued and outstanding
2,300,000 at September 30, 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 September 30, 1997, and
December 31, 1996 139,157 139,157
Common stock, $.01 par value; authorized 50,000,000;
Issued and outstanding 28,810,006 at September 30,
1997, and 28,647,714 at December 31, 1996 288 286
Additional paid-in capital 395,061 393,156
Unrealized foreign currency translation losses (16,736) (14,961)
Unrealized gains on securities available for sale 26,689 20,064
Retained earnings 245,926 186,032
Treasury shares (27,459) (3,370)
Notes receivable secured by common stock (2,672) (1,500)
---------- ----------
Total shareholders' equity 870,767 829,377
---------- ----------
Total liabilities and shareholders' equity $4,819,663 $4,809,323
========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
<PAGE> 4
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
(UNAUDITED)
<TABLE>
<CAPTION>
----------------------------- ----------------------------
THREE MONTH PERIODS ENDED NINE MONTH PERIODS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- ----------------------------
(AS RESTATED) (AS RESTATED)
1997 1996 1997 1996
--------- --------- --------- ------------
<S> <C> <C> <C> <C>
REVENUES:
Premiums, principally accident and sickness $ 65,948 $ 62,237 $ 194,668 $ 189,417
Interest sensitive product policy charges 22,412 22,408 68,688 67,752
Net investment income 69,492 61,820 206,256 141,407
Other income 8,882 6,375 20,313 16,793
Net gains from sale of investments 6,234 656 14,767 84
--------- --------- --------- ---------
Total revenues 172,968 153,496 504,692 415,453
--------- --------- --------- ---------
BENEFITS AND EXPENSES:
Claims incurred 51,028 48,128 146,238 137,124
Change in liability for future policy benefits and
other policy benefits 24,371 24,441 78,823 47,940
Amortization of present value of insurance in force
and deferred policy acquisition costs 22,744 15,591 64,298 42,927
Amortization of costs in excess of net assets
acquired 2,565 2,363 7,460 6,256
Underwriting and other administrative expenses 40,815 28,030 101,058 85,744
Interest and amortization of deferred debt issuance costs 5,902 4,781 15,719 14,759
Restructuring charge -- -- 19,071 --
--------- --------- --------- ---------
Total benefits and expenses 147,425 123,334 432,667 334,750
--------- --------- --------- ---------
Income before income taxes, undistributed earnings
(losses) in unconsolidated affiliates and
extraordinary charge 25,543 30,162 72,025 80,703
Income taxes 8,329 11,363 26,783 30,152
-------- --------- -------- ---------
Net income before undistributed earnings (losses)
in unconsolidated affiliates and extraordinary
charge 17,214 18,799 45,242 50,551
Undistributed earnings (losses)
in unconsolidated affiliates 13,740 4,461 16,158 12,834
--------- --------- --------- ---------
Net Income before extraordinary charge 30,954 23,260 61,400 63,385
Extraordinary charge -- (322) -- (1,138)
--------- ---------- --------- ---------
Net income 30,954 22,938 61,400 62,247
Preferred stock dividend requirements 4,884 4,236 14,685 9,636
--------- --------- --------- ---------
Net income applicable to common stock $ 26,070 $ 18,702 $ 46,715 $ 52,611
========= ========= ========= =========
PER SHARE INFORMATION:
Primary:
Net income applicable to common stock before
extraordinary charge $ 0.90 $ 0.64 $ 1.61 $ 1.92
Extraordinary charge -- (0.01) -- (0.04)
--------- --------- --------- ---------
Net income applicable to common stock $ 0.90 $ 0.63 $ 1.61 $ 1.88
========= ========= ========= =========
Common shares used in computing primary earnings per share
(in thousands) 28,880 29,497 28,954 28,038
========= ========= ========= =========
Fully diluted:
Net income applicable to common stock before
extraordinary charge $ 0.80 $ 0.61 $ 1.57 $ 1.80
Extraordinary charge -- (0.01) -- (0.03)
--------- --------- --------- ---------
Net income applicable to common stock $ 0.80 $ 0.60 $ 1.57 $ 1.77
========= ========= ========= =========
Common shares used in computing fully diluted
earnings per share (in thousands) 38,087 37,102 38,161 33,993
========= ========= ========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
<PAGE> 5
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTH PERIODS ENDED SEPTEMBER 30,
--------------------------------------
(AS RESTATED)
1997 1996
--------- ---------
<S> <C> <C>
Net cash provided by operating activities $ 53,086 $ 77,345
--------- ---------
Cash flows from investing activities:
Cash expended in acquisition of business -- (124,957)
Purchases of invested assets (967,350) (771,569)
Sales of invested assets 811,831 503,633
Maturities of invested assets 201,458 59,678
Other, primarily short term investments, net 38,046 240,197
--------- ---------
Net cash provided (used) by investing activities 83,985 (93,018)
--------- ---------
Cash flows from financing activities:
Issuance of common stock 1,910 156,078
Issuance of preferred stock -- 139,157
Treasury stock purchase (24,089) --
Additional borrowings 240,200 188,999
Reduction in notes payable (100,000) (300,354)
Redemption of preferred stock (14,700) --
Dividends on preferred stock and common stock (17,619) (10,030)
Receipts from interest sensitive policies credited to policyholder account
balances 156,381 104,380
Return of policyholder account balances on interest sensitive products (397,126) (239,119)
Other, net (1,172) (52,360)
--------- ---------
Net cash used by financing activities (156,215) (13,249)
--------- ---------
Decrease in cash (19,144) (28,922)
Cash at beginning of period 39,464 40,325
--------- ---------
Cash at end of period $ 20,320 $ 11,403
========= =========
Supplemental disclosures:
Income taxes paid $ 3,031 $ 3,967
========= =========
Interest paid $ 12,813 $ 11,153
========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
<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" or "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"), 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 ("United Life"), Marketing One, Inc.
("Marketing One"), a third party marketing organization, 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 subsidiaries. The accompanying financial statements reflect all
adjustments which are, in the opinion of management, necessary to a fair
statement of the results for the periods presented. Such adjustments are of a
normal and recurring nature. 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.
The Company has restated its financial statements for each of the years in the
three year period ended December 31, 1996 as well as for the three month period
ended March 31, 1997, the three and six month periods ended June 30, 1997, and
the three and nine month periods ended September 30, 1996. The restatement
resulted from the Company reconsidering certain accounting practices after
discussions with the Securities and Exchange Commission Division of Corporation
Finance. The significant changes in accounting practices incorporated in the
restatement which impacted the three and nine month periods ended September 30,
1997 and 1996 are (i) the methodology for determining deferrable acquisition
costs, (ii) amortization methods for deferred acquisition costs, (iii) the
recognition of certain reserve adjustments for interest sensitive products,
(iv) the allocation of purchase consideration and (v) the consolidation of a
majority owned subsidiary. For additional information on the restatement see
Note 8.
As a result of the Company's decision to exit the private placement bond
sector, the Company transferred all of its remaining assets in the fixed
maturities held for investment portfolio to its fixed maturities available for
sale portfolio as of April 1, 1997. In accordance with Statement of Financial
Accounting Standards ("SFAS") No. 115, the Company marked all assets subject to
the transfer to fair value resulting in an increase in shareholders' equity,
net of applicable income taxes, of approximately $1,800.
<PAGE> 7
(2) PENDING ACQUISITION, AND RELATED TRANSACTIONS
On November 25, 1996, the Company and Washington National Corporation
("Washington National") entered into a merger agreement. The merger agreement
terminated on August 30, 1997. As a result of the Company not consummating the
merger with Washington National, certain acquisition related costs aggregating
$6,643, which would have been capitalized into the Company's basis in
Washington National, have been expensed during the period and are included in
underwriting and other administrative expenses.
The Company's pending acquisitions of the controlling interest in Southwestern
Financial Corporation and subsidiaries ("SW Financial") and the Fickes and
Stone Knightsbridge Interests, as well as the Company's 1997 annual
stockholders' meeting, have been delayed pending completion of the Company's
discussions with the Securities and Exchange Commission. The Company intends to
proceed with these matters by the end of the fourth quarter of 1997.
<PAGE> 8
(3) SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES ("SW Financial")
Through its direct and indirect investment in SW Financial, the Company owns
approximately 78.0% of the economic interest in SW Financial. As a result of
the Company's discussions with the SEC, SW Financial has also reconsidered
certain of its accounting practices and has restated its financial statements
for the years ended December 31, 1996 and 1995, and for the three and nine
month periods ended September 30, 1996.
The following accounting practices incorporated in the restatement are as
follows:
(i) the recognition of investment income which resulted in a $232 and $182
decline in investment income for the nine month periods ended September
30, 1997 and 1996, respectively and;
(ii) the allocation of purchase consideration which resulted in a $50 and $99
reduction in the amortization of cost in excess of net asset acquired
for the nine month periods ended September 30, 1997 and 1996,
respectively.
Financial information for SW Financial, accounted for utilizing the equity
method, is provided below.
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
(AS RESTATED)
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ -----------------
(UNAUDITED)
<S> <C> <C>
ASSETS:
Invested assets $1,644,119 $1,641,348
Insurance assets 107,159 107,230
Other assets 404,819 459,324
---------- ----------
Total assets $2,156,097 $2,207,902
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities $1,689,481 $1,745,160
Long-term debt 154,750 159,750
Other liabilities 98,188 127,237
Mandatory redeemable preferred stock 36,112 33,879
Shareholders' equity 177,566 141,876
---------- ----------
Total liabilities and
shareholders' equity $2,156,097 $2,207,902
========== ==========
</TABLE>
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTH PERIODS ENDED NINE MONTH PERIODS ENDED
--------------------------------------------- -------------------------------------------
(AS RESTATED) (AS RESTATED)
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996 SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
---------------------- ---------------------- ---------------------- --------------------
<S> <C> <C> <C> <C>
REVENUES:
Policy revenues $ 36,801 $ 36,290 $110,419 $161,106
Net investment income 31,974 32,275 95,202 96,858
Net gains from sale of investments 1,247 2,917 1,797 2,908
Other income 3,796 4,599 12,889 12,886
-------- -------- -------- --------
Total revenues 73,818 76,081 220,307 273,758
-------- -------- -------- --------
BENEFITS AND EXPENSES:
Policyholder benefits 25,028 29,039 125,270 157,428
Amortization 6,504 9,540 18,391 21,498
Underwriting and other
administrative expenses 10,371 22,901 29,578 53,463
Interest and related debt costs 3,452 3,501 10,332 10,511
-------- -------- -------- --------
Total benefits and expenses 45,355 64,981 183,571 242,900
-------- -------- -------- --------
Income before income taxes 28,463 11,100 36,736 30,858
Income taxes 9,987 4,448 13,786 11,653
-------- -------- -------- --------
Net income 18,476 6,652 22,950 19,205
Preferred stock dividend
requirements 762 696 2,234 2,043
-------- -------- -------- --------
Net income applicable to common Stock $ 17,714 $ 5,956 $ 20,716 $ 17,162
======== ======== ======== ========
</TABLE>
<PAGE> 9
(4) RESTRUCTURING CHARGE
As a result of the Company's initiative to implement an operating division
structure, the Company recorded a cumulative pre-tax restructuring charge of
$19,071 during the three month period ended March 31, 1997.
For the three and nine month periods ended September 30, 1997, $1,133 and
$4,021, respectively, of severance and related benefits as well as holding
costs of vacated facilities have been charged against the restructuring accrual.
The Company estimates approximately $1,040 and $4,446 of pre-tax incremental
costs associated with the restructuring were incurred during the three and nine
month periods ended September 30, 1997, respectively, and are included in the
Company's results of operations.
(5) REDEMPTION OF PREFERRED STOCK, CERTAIN EQUITY TRANSACTIONS AND EARNINGS
PER SHARE
On January 11, 1997, the Company repurchased 100,000 shares of the Company's
Common Stock for an aggregate purchase price of $35.38 per share resulting in a
$3,538 increase in the value of treasury shares held.
On March 15, 1997, the Company redeemed all of the previously outstanding
Series B mandatory redeemable preferred stock at its stated redemption value
of $14,700.
The Company purchased from United Companies Financial Corporation ("UCFC"),
the former parent of United Life, 483,839 shares of the Company's Common
Stock for an aggregate purchase price of $17,900 plus $295 of accrued
interest through the closing date, June 9, 1997. The value of treasury
shares held increased $17,900 as a result of this transaction.
On September 22, 1997 the Company's Board of Directors authorized the Company
to repurchase up to 4,500,000 shares of the Company's Common Stock in the open
market, through negotiated transactions or otherwise. During the three month
period ended September 30, 1997 the Company repurchased 175,000 shares at an
average purchase price of $30.92 per share. As a result of such repurchase the
value of shares held in treasury has increased $5,411.
During the nine month period ended September 30, 1997, certain employees and
agents exercised stock options and warrants resulting in the issuance of
174,019 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 $4,694,
respectively.
During the nine month period ended September 30, 1997 certain officers
purchased 135,000 shares of the Company's Common Stock. In certain instances,
proceeds were made available through loans originated by the Company
aggregating $1,172.
(6) CERTAIN OTHER TRANSACTIONS
On August 5, 1997, the Company purchased $40,000 of SW Financial Convertible
Subordinated Notes due 2005 (the "SW Financial Notes") from the liquidating
trust for the creditors of ICH Corporation, the former parent of Southwestern
Life Insurance Company and Union Bankers Insurance Company. SW Financial had
issued the SW Financial Notes as part of the acquisition consideration paid to
ICH Corporation. The SW Financial Notes were purchased by the Company at par in
anticipation of the acquisition of the Controlling Interest in SW Financial.
Interest due under the SW Financial Notes is set at 7.0%, per annum.
On September 1, 1997 the Company purchased $25,000 of ACO Acquisition Corp.
(subsequently re-named Acordia, Inc. ("Acordia")) subordinated indebtedness and
$20,000 of ACO Brokerage Holdings Corporation ("ACO"), an affiliate of Acordia,
preferred stock. The Acordia subordinated notes pay interest on a current basis
at 12.5%, per annum, payable in semi-annual installments. The ACO preferred
stock dividends are payable in cash (subject to certain restrictions), or
in-kind at the option of ACO, at a rate of 17 percent per annum. Acordia is an
insurance broker specializing in the marketing of commercial property and
casualty insurance programs and other non-insurance products. Acordia is 28.6%
owned by Knightsbridge. PennCorp received fees aggregating $1,100 from Acordia
for its underwriting and participation in the subordinated notes and preferred
stock. KM received sponsor fees and other fees aggregating $1,714 from Acordia
for its role in consummating the Acordia acquisition. As part of the Acordia
transaction, Messrs. Stone and Fickes were required, as the general partners of
Knightsbridge, to invest $5,200 in the equity of Acordia. Upon consummation of
the acquisition of the Stone and Fickes Knightsbridge interest, the Company is
required to purchase Stone and Fickes interests in Acordia at cost, plus
interest.
<PAGE> 10
(7) NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
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".
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 calculated in accordance with SFAS No. 128 for the three
month and nine month periods ended September 30, 1997 and 1996, are as follows:
<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED NINE MONTH PERIOD ENDED
------------------------------------------------- ----------------------------------------
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996 SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
-------------------------------- --------------- ----------------------------------------
<S> <C> <C> <C> <C>
Basic $0.93 $0.66 $1.66 $1.96
===== ===== ===== =====
Diluted $0.80 $0.60 $1.57 $1.77
===== ===== ===== =====
</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. The Company anticipates no changes to present disclosures will be
required under SFAS No. 129.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income".
SFAS No. 130 is effective for annual and interim periods ending after December
15, 1997, although early adoption is permitted. This statement establishes
standards for reporting and displaying comprehensive income and its components
and requires all items to be recognized under accounting standards as
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements. Examples of items that
will be included in the Company's presentation of comprehensive income, in
addition to net income, are unrealized foreign currency translation gains and
losses as well as unrealized gains and losses on securities available for sale.
The Company is currently evaluating the necessary changes to its disclosures.
In June 1997, the FASB also adopted SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information". SFAS No. 131 is effective for annual and
interim periods ending after December 31, 1997, although early adoption is
permitted. This statement establishes standards for the methodology public
entities use to report information about operating segments in annual financial
statements and selected information about operating segments in interim
financial reports issued to shareholders. Operating segments are components of
an enterprise about which separate operating information is available and is
periodically evaluated by management. The statement requires that companies
disclose operating segment data on the same basis utilized internally for
evaluating segment performance and determining the allocation of corporate
resources. Disclosure requirements include operating segment profit or loss,
certain specific revenue and expense items, operating segment assets, as well as
various reconciliations of total operating segment information to amounts in the
consolidated financial statements. The Company is currently evaluating the
appropriate disclosure changes in conjunction with the implementation of the
operating division structure initiated in the first quarter of 1997.
<PAGE> 11
(8) RESTATEMENT OF CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The Company has restated its financial statements for each of the years in the
three year period ended December 31, 1996, as well as the three and nine month
periods ended September 30, 1996. The restatement resulted from the Company
reconsidering certain accounting practices after discussions with the
Securities and Exchange Commission's Division of Corporation Finance.
The significant changes in accounting practices incorporated in the restatement
are as follows:
(i) the methodology for determining deferrable acquisition costs (ii) the
amortization of deferred acquisition costs (iii) the recognition of reserve
adjustments for interest sensitive products, (iv) the allocation of purchase
consideration for certain acquisitions, and (v) the consolidation of a
majority-owned subsidiary.
In addition, the Company corrected immaterial errors identified in previously
issued financial statements.
The following page presents the effects of the restatement on the consolidated
condensed statements of income presented herein. Additional information
regarding the restatement is available on PennCorp's Form 8-K filed on November
14, 1997.
<PAGE> 12
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
---------------------------- ----------------------------
Three month period ended Nine month period ended
September 30, 1996 September 30, 1996
---------------------------- ----------------------------
(As reported) (As restated) (As reported) (As Restated)
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
REVENUES:
Premiums, principally accident and sickness $ 62,237 $ 62,237 $ 189,417 $ 189,417
Interest sensitive policy product charges 22,408 22,408 67,752 67,752
Net investment income 60,878 61,820 145,293 141,407
Other income 1,714 6,375 2,542 16,793
Net gains (losses) from sale of investments (3,344) 656 84 84
--------- --------- --------- ---------
Total revenues 143,893 153,496 405,088 415,453
--------- --------- --------- ---------
BENEFITS AND EXPENSES:
Claims incurred 47,443 48,128 137,124 137,124
Change in liability for future policy benefits and
other policy benefits 24,719 24,441 46,460 47,940
Amortization of present value of insurance in force
and deferred policy acquisition costs 13,754 15,591 42,018 42,927
Amortization of costs in excess of net assets acquired 2,109 2,363 5,789 6,256
Underwriting and other administrative expenses 22,125 28,030 69,994 85,744
Interest and amortization of deferred debt issuance costs 4,781 4,781 15,159 14,759
--------- --------- --------- ---------
Total benefits and expenses 114,931 123,334 316,544 334,750
--------- --------- --------- ---------
Income before income taxes, undistributed earnings of unconsolidated
affiliates and extraordinary charge 28,962 30,162 88,544 80,703
Income taxes 10,875 11,363 32,793 30,152
--------- --------- --------- ---------
Net income before undistributed earnings in unconsolidated
affiliates and extraordinary charge 18,087 18,799 55,751 50,551
Undistributed earnings in unconsolidated affiliates 4,477 4,461 12,884 12,834
--------- --------- --------- ---------
Net income before extraordinary charge 22,564 23,260 68,635 63,385
Extraordinary charge (322) (322) (1,138) (1,138)
--------- --------- --------- ---------
Net income 22,242 22,938 67,497 62,247
Preferred stock dividend requirements 4,236 4,236 9,636 9,636
--------- --------- --------- ---------
Net income applicable to common stock $ 18,006 $ 18,702 $ 57,861 $ 52,611
========= ========= ========= =========
Primary:
Net income applicable to common stock before extraordinary charge $ 0.62 $ 0.64 $ 2.10 $ 1.92
Extraordinary charge (0.01) (0.01) (0.04) (0.04)
--------- --------- --------- ---------
Net income applicable to common stock $ 0.61 $ 0.63 $ 2.06 $ 1.88
========= ========= ========= =========
Common shares used in computing primary earnings per share 29,497 29,497 28,038 28,038
========= ========= ========= =========
Fully diluted:
Net income applicable to common stock before extraordinary charge $ 0.59 $ 0.61 $ 1.95 $ 1.80
Extraordinary charge (0.01) (0.01) (0.03) (0.03)
--------- --------- --------- ---------
Net income applicable to common stock $ 0.58 $ 0.60 $ 1.92 $ 1.77
========= ========= ========= =========
Common shares used in computing fully diluted earnings per share 37,102 37,102 33,993 33,993
========= ========= ========= =========
</TABLE>
<PAGE> 13
REVIEW BY INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The September 30, 1997 and 1996, financial statements included in this filing
have been reviewed by KPMG Peat Marwick LLP, independent certified public
accountants, in accordance with established professional standards and
procedures for such a review.
The report of KPMG Peat Marwick LLP commenting upon their review is included on
page 14.
[REST OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 14
Independent Auditors' Review Report
The Board of Directors and Shareholders of PennCorp Financial Group, Inc.
We have reviewed the accompanying consolidated condensed balance sheet of
PennCorp Financial Group, Inc. and subsidiaries as of September 30, 1997, the
consolidated condensed statements of income for the three and nine-month
periods ended September 30, 1997 and 1996, and the consolidated condensed
statements of cash flows for the nine-month periods ended September 30, 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 (except as to Note 19 which
is as of November 14, 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
November 14, 1997
Raleigh, North Carolina
<PAGE> 15
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 Form 8-K dated November 14, 1997 and the consolidated
condensed financial statements and related notes of this Quarterly Report on
Form 10-Q.
Introduction. In August 1997, PennCorp Financial Group, Inc. ("PennCorp", the
"Company") announced that it would likely be restating its financial statements
for each of the years in the three year period ended December 31, 1996, the
three month period ended March 31, 1997, the three month and six month periods
ended June 30, 1997, and the three and nine month periods ended September 30,
1996. The discussion below reflects the restated amounts for the periods
presented. Further information regarding the restatement is provided in Note 8
of the Notes to Unaudited Consolidated Condensed Financial Statements contained
elsewhere herein.
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 Company (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, 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 "Management's Discussion and Analysis of Financial Condition
and Results of Operations" have been affected by several important factors,
each of which is discussed below.
<PAGE> 16
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 its existing business units and
commenced a plan to segregate its businesses into operating divisions. The
Company considered the impact the acquisition of the controlling interest in SW
Financial 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 acquisition and related transactions. As a result, it is
probable that the Company will incur certain additional restructuring charges
once it acquires the controlling interest in SW Financial.
As a result of the initiative to implement an operating division structure, the
Company recorded a cumulative pre-tax restructuring charge of $19.1 million
during the three month period ended March 31, 1997.
For the three month and nine month periods ended September 30, 1997,
$1.1 million and $4.0 million, respectively, of severance and related benefits
as well as holding costs of vacated facilities have been charged against the
restructuring accrual.
The Company estimates approximately $1.0 million and $4.4 million of pre-tax
incremental costs associated with the restructuring were incurred during the
three month and nine month periods ended September 30, 1997, respectively, and
included in the Company's results of operations.
Transaction Costs. On August 30, 1997 the merger agreement between Washington
National Corporation ("Washington National") and the Company terminated. The
Company incurred significant legal, accounting and financial advisory fees
associated with the proposed merger which the Company had capitalized pending
the completion of the merger. In addition, the Company had begun to provide
certain resources to Washington National including personnel to perform policy
administration and claim processing functions on Washington National's behalf.
Aggregate costs incurred by the Company ("transaction costs") in anticipation of
the merger and associated business processing were $6.6 million. These costs
are included in underwriting and other administrative expenses for the nine and
three month periods ended September 30, 1997.
<PAGE> 17
The following tables reflect pro forma results of operations eliminating the
impact of the restructuring costs and transaction costs, associated
with the terminated merger with Washington National, incurred by the Company
for the three month and nine month periods ended September 30, 1997:
<TABLE>
<CAPTION>
THREE MONTH
THREE MONTH PERIOD ENDED PERIOD ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------------------------------------------- ------------------
RESTRUCTURING AND
AS REPORTED TRANSACTION COSTS AS REPORTED (NET) (AS RESTATED)
---------------- ------------------ ----------------- ------------------
<S> <C> <C> <C> <C>
-------- -------- --------
Operating Information:
Total revenues: $172,968 $172,968 $153,496
-------- -------- --------
Benefits and expenses:
Claims incurred 51,028 -- 51,028 48,128
Change in liability for
future policy benefits and other
policy benefits 24,371 -- 24,371 24,441
Amortization of present value of
insurance in force and deferred
policy acquisition costs 22,744 -- 22,744 15,591
Amortization of costs in excess of
net assets acquired 2,565 -- 2,565 2,363
Underwriting and other administrative
expenses 40,815 8,254 32,561 28,030
Interest and amortization of deferred
debt issuance costs 5,902 -- 5,902 4,781
Restructuring charge -- -- -- --
-------- -------- --------
Total benefits and expenses 147,425 139,171 123,334
-------- -------- --------
Income before income taxes,
undistributed earnings (losses) in
unconsolidated affiliates and
extraordinary charge 25,543 33,797 30,162
Income taxes 8,329 2,889 11,218 11,363
-------- -------- --------
Net income before undistributed
earnings (losses) in unconsolidated
affiliates and extraordinary charge 17,214 22,579 18,799
Undistributed earnings (losses)
in unconsolidated affiliates 13,740 -- 13,740 4,461
-------- -------- --------
Net income before extraordinary charge 30,954 36,319 23,260
Extraordinary charge -- -- -- (322)
-------- -------- --------
Net income 30,954 36,319 22,938
Preferred stock dividend
requirements 4,884 -- 4,884 4,236
-------- -------- --------
Net income applicable to common stock $ 26,070 $ 31,435 $ 18,702
======== ======== ========
Per Share Information:
Primary:
Net income applicable to common
stock before extraordinary
charge $ 0.90 $ 1.09 $ 0.64
Extraordinary charge -- -- (0.01)
-------- -------- --------
Net income applicable to
common stock $ 0.90 $ 1.09 $ 0.63
======== ======== =========
Weighted average primary
shares outstanding (in
thousands) 28,880 28,880 29,497
======== ======== ========
Fully diluted:
Net income applicable to
common stock before extra-
ordinary charge $ 0.80 $ 0.94 $ 0.61
Extraordinary charge -- -- (0.01)
-------- -------- --------
Net income applicable to
common stock $ 0.80 $ 0.94 $ 0.60
======== ======== ========
Weighted average fully diluted
shares outstanding (in
thousands) 38,087 38,087 37,102
======== ======== ========
<CAPTION>
---------------------------------------------------------------------------
NINE MONTH
NINE MONTH PERIOD ENDED PERIOD ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------------------------------------------- ------------------
RESTRUCTURING AND
AS REPORTED TRANSACTION COSTS AS REPORTED (NET) (AS RESTATED)
---------------- ------------------ ----------------- ------------------
<C> <C> <C> <C>
-------- -------- --------
Operating Information:
Total revenues: $504,692 $504,692 $415,453
-------- -------- --------
Benefits and expenses:
Claims incurred 146,238 -- 146,238 137,124
Change in liability for
future policy benefits and other
policy benefits 78,823 -- 78,823 47,940
Amortization of present value of
insurance in force and deferred
policy acquisition costs 64,298 -- 64,298 42,927
Amortization of costs in excess of
net assets acquired 7,460 -- 7,460 6,256
Underwriting and other administrative
expenses 101,058 10,110 90,948 85,744
Interest and amortization of deferred
debt issuance costs 15,719 -- 15,719 14,759
Restructuring charge 19,071 19,071 -- --
-------- -------- --------
Total benefits and expenses 432,667 403,486 334,750
-------- -------- --------
Income before income taxes,
undistributed earnings in
unconsolidated affiliates and
extraordinary charge 72,025 101,206 80,703
Income taxes 26,783 10,213 36,996 30,152
-------- -------- ---------
Net income before undistributed
earnings in unconsolidated affiliates
and extraordinary charge 45,242 64,210 50,551
Undistributed earnings in
unconsolidated affiliates 16,158 -- 16,158 12,834
-------- -------- ---------
Net income before extraordinary 61,400 80,368 63,385
charge
Extraordinary charge -- -- -- (1,138)
-------- -------- ---------
Net income 61,400 80,368 62,247
Preferred stock dividend
requirements 14,685 -- 14,685 9,636
-------- -------- ---------
Net income applicable to common stock $ 46,715 $ 65,683 $ 52,611
======== ======== =========
Per Share Information:
Primary:
Net income applicable to common
stock before extraordinary
charge $ 1.61 $ 2.27 $ 1.92
Extraordinary charge -- -- (0.04)
-------- -------- ----------
Net income applicable to
common stock $ 1.61 $ 2.27 $ 1.88
======== ======== =========
Weighted average primary
shares outstanding (in
thousands) 28,954 28,954 28,038
======== ======== =========
Fully diluted:
Net income applicable to
common stock before extra-
ordinary charge $ 1.57 $ 2.07 $ 1.80
Extraordinary charge -- -- (0.03)
-------- -------- ----------
Net income applicable to
common stock $ 1.57 $ 2.07 $ 1.77
======== ======== =========
Weighted average fully diluted
shares outstanding (in
thousands) 38,161 38,161 33,993
======== ======== =========
</TABLE>
<PAGE> 18
Ongoing Business Evaluation. As part of the strategic business evaluation which
resulted in the Company's divisional restructuring, the Company reviewed each
of the operating companies and the impact of those operating companies on
PennCorp's current and long-term profitability potential, the ability of the
operating companies to absorb operations related to future acquisitions and the
market focus of the operating companies. PennCorp's evaluation is ongoing and
considers the possibility of potential divestitures of certain of its operating
subsidiaries which no longer fit into the strategic business plan.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Liquidity. 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 nine month period ended September 30, 1997 the Company received $27.1
million in interest payments or dividends from its subsidiaries and paid $9.9
million, $13.3 million and $4.2 million in interest and preferred stock and
common stock dividends, respectively. For the remainder of 1997, the Company
believes that it may need to utilize funds available under its revolving credit
facility to fund a modest shortfall in available cash. For periods beginning in
1998, under current statutory limitations, the Company believes that it will
receive sufficient cash flow from its 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 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 $30.0 million to
$40.0 million to PennCorp, subject to applicable regulatory approvals.
The Company has recently received in final or draft form the results of
examinations completed by various state departments of insurance ("Exam
Reports"). The Exam Reports have resulted in a reduction in the net statutory
capital and surplus aggregating $51.2 million which were partially offset by
additional capital contributions of $37.2 million. The Company believes that
such net reductions will not have a material impact on the Company's ability to
receive interest and dividend payments from its subsidiaries or restrict
operations in any material fashion.
During the three-month period ended September 30, 1997, the Company borrowed
funds aggregating $64.9 million to acquire the SW Financial Notes and the ACO
preferred stock. In addition during the nine month period ended September 30,
1997 the Company borrowed to make capital contributions to its insurance
subsidiaries, repurchase the Series B Preferred Stock, fund certain operating
and restructuring costs, and repurchase its Common Stock aggregating $37.2
million, $14.7 million, $6.3 million, and $24.1 million, respectively.
Cash Flow. During the nine-month period ended September 30, 1997, cash provided
by operations was $53.1 million compared to $78.2 million for the
nine month period ended September 30, 1996. United Life provided $67.9 million
in 1997, consisting primarily of investment income. Excluding United Life for
the nine month periods ended September 30, 1997 and 1996, cash flow from
operations declined by $14.8 million when compared to the nine month period
ended September 30, 1996. This decline was primarily the result of $8.5
million of payments associated with restructuring costs, $4.1 million of costs
associated with the terminated Washington National merger.
Pending Acquisition and Related Transactions. The Company's pending acquisitions
of the controlling interest in SW Financial and Fickes and Stone Knightsbridge
Interests, as well as the annual stockholders' meeting, are also pending
completion of the Company's discussions with the SEC. The Company intends to
proceed with these matters during the fourth quarter of 1997. The Company
intends to fund the acquisition of the controlling interest in SW Financial with
funds drawn under its revolving credit agreement. Covenants contained in the
revolver may require the Company to raise additional equity within 90 days of
consummating the acquisition.
RESULTS OF OPERATIONS
Policy Revenue. Total policy revenue for the nine-month period ended September
30, 1997, increased 2.4% to $263.4 million from $257.2 million for the
comparable 1996 period. Life product revenue increased $12.7 million as a result
of the inclusion of United Life, which added $5.0 million of additional life
revenue and modest increases in life revenue at AA Life and Integon Life of
$3.1 million and $3.5 million, respectively. Fixed benefit accident and sickness
product revenue declined $4.3 million. The decline in policy revenue from
accident and sickness products was primarily attributable to the Company's
decision during 1995 to discontinue new business production of certain
disability income products. Policy revenue from foreign operations (primarily
Canada) increased 7.7% or approximately $2.5 million. Policy revenue expressed
in Canadian dollars increased 8.5% or $3.7 million (Canadian).
<PAGE> 19
For the three month period ended September 30, 1997, total policy revenues
increased 4.4% to $88.4 million compared to $84.6 million for the three-month
period ended September 30, 1996. For the three month period ended September 30,
1997, United Life added $900,000 of policy revenues. AA Life and Integon Life
added life policy revenues of $1.0 million and $2.0 million, respectively, over
the comparable 1996 period. Policy revenues from fixed benefit products
declined $750,000.
Net Investment Income. Net investment income for the nine months ended September
30, 1997, was $206.3 million compared to $141.4 million for the nine months
ended September 30, 1996. Of the $66.5 million increase in investment income,
$61.9 million was attributable to the addition of United Life. Yield, based upon
weighted average amount of invested assets outstanding each period, was
approximately 7.7% and 7.4% for the nine month periods ended September 30, 1997
and 1996, respectively which resulted in the Company realizing $2.8 million of
additional investment income. For the nine month and three month periods ended
September 30, 1997, the Company realized additional income on certain fixed
maturity investments as the result of accelerated interest payments of $1.1
million.
Net investment income for the three-month period ended September 30, 1997,
increased to $69.5 million from $61.8 million for the comparable period in 1996.
A significant portion of the increase was attributable to United Life which
positively impacted investment income by $6.3 million. During the three month
period the Company realized fee income associated with certain investments
aggregating $1.1 million. In addition, slightly higher yields on the portfolio,
excluding United Life, which increased to 7.6% from 7.3% resulted in
approximately $1.1 million of additional investment income for the three month
period ended September 30, 1997, compared to the three month period ended
September 30, 1996.
Other income. Other income is principally generated by the Company's bank
marketing distribution channel, Marketing One. For the nine month and three
month periods ended September 30, 1997 and 1996, Marketing One generated
revenues of $13.4 million and $3.4 million compared with $15.7 million and $4.4
million for the comparable 1996 periods, respectively. The decline in
commission revenues of Marketing One for each of the periods is primarily the
result of losses in marketing relationships with smaller community banks which
continue to be acquired by large institutions with established third party
marketing relationships of their own. To replace the declining bank marketing
channel, Marketing One has recently focused on developing wholesaler
relationships. It is too early to determine if Marketing One will be able to
fully replace the lost revenue from the community bank distribution channels.
In addition, for the nine and three month period ended September 30, 1997 the
Company realized revenue amounting to $4.4 million as a result of entering into
an assumption reinsurance transaction associated with the sale of its
Panamanian operation.
In conjunction with the Company's acquisition and investment activities, the
Company is regularly presented with opportunities to invest in substantially
undervalued securities in corporations which will likely undertake some form of
restructuring. In 1995, the Company established a trading security account for
such investments. Included in other income for the nine and three month periods
ended September 30, 1996, are gains of $800,000 and $1.0 million resulting
from such activities. The Company substantially liquidated its trading
portfolio during 1997 and had no gains or losses associated with the
liquidation.
Realized investment gains and losses. During the nine month periods ended
September 30, 1997 and 1996, the Company realized gains on the disposal of
invested assets of $14.8 million and $84,000, respectively. Of these gains
approximately $5.3 million and $0 during 1997 and 1996, respectively, were
the result of sales of assets backing interest sensitive liabilities which
resulted in the Company accelerating the amortization of deferred acquisition
costs and present value of insurance in force assets by $3.9 million and $0 for
the nine month periods ended September 30, 1997 and 1996, respectively.
Accelerated amortization results from the anticipation of declining spreads on
interest sensitive products in the future due to lower current reinvestment
rates and the realization of future anticipated investment income in realized
gains from sale of investments.
<PAGE> 20
During the three month periods ended September 30, 1997 and 1996, the Company
realized gains on the disposal of invested assets of $6.2 million and $656,000,
respectively. Of those gains, approximately $1.8 million and $0 during the
three month periods ended September 30, 1997 and 1996, respectively, were
associated with assets backing interest sensitive liabilities which resulted in
the Company accelerating the amortization of deferred acquisition costs and the
present value of insurance in force of $2.0 million and $0, respectively.
The Company sold certain securities and realized gains in order to exit certain
equity sectors and to ensure availability of funds necessary to handle the heavy
volume of annuity surrenders anticipated due to the ending of the surrender
charge period for a substantial portion of annuities sold five years ago.
Claims Incurred. Claims incurred for the nine month period ended September 30,
1997 increased 6.7% to $146.2 million from $137.1 million for the nine-month
period ended September 30, 1996. The inclusion of United Life resulted in $5.3
million of additional claims. In addition, OLIC life claims increased $3.2
million during the first nine months of 1997 when compared to the first nine
months of 1996. Although OLIC continues to incur higher life claims than
historical averages, the Company does not believe that current claim patterns
indicate permanent adverse mortality, but rather a short term elevation in the
incidence of mortality.
For the three month period ended September 30, 1997, claims incurred increased
6.0% to $51.0 million from $48.1 million for the comparable period in 1996. The
increase in claims was the result of Integon Life. Integon Life experienced a
$2.9 million increase in mortality for the three month period ended September
30, 1997 compared to 1996. Such minor deviations in mortality are within the
range of expectations of the Company.
The Company is currently reviewing claims development with certain closed blocks
of fixed benefit insurance products. The Company anticipates completing its
review later in 1997 or early 1998.
Underwriting and Other Administrative Expenses. Excluding the impact of the
restructuring charges and transaction costs incurred during the nine month
period ended September 30, 1997, underwriting and other administrative expenses
increased 6.1% to $90.9 million from $85.7 million for the nine-month period
ended September 30, 1996. The increase is primarily attributable to the
inclusion of $7.1 million of expenses as a result of the acquisition of United
Life. Offsetting the increases was a decline in the Company's Raleigh-based
operations expense structure of $5.0 million, as a result of the restructuring
of Professional, OLIC and Integon Life. In addition, the Company incurred
additional expenses aggregating $3.5 million associated with administrative
system conversions.
Excluding the impact of the restructuring charges and transaction costs,
underwriting and other administrative expenses increased by $4.5 million to
$32.6 million for the three month period ended September 30, 1997, compared to
$28.0 million for the same period of 1996. Approximately $1.3 million was
attributable to United Life. In addition, during the three month period ended
September 30, 1997, certain non-insurance subsidiaries incurred additional
expenses of approximately $1.1 million primarily associated with
administrative systems conversion costs including the Year 2000 compliance
efforts.
The Company anticipates it will continue to incur administrative system costs in
excess of normalized run rates for the remainder of 1997 and 1998. The Company
estimates total costs incurred during 1997 associated with Year 2000 compliance
to be $1.1 million. Management has engaged a consulting firm to assess the
Company's Year 2000 compliance requirements and plans. The consultants expect
to report their findings and recommendations to the Company before December 31,
1997, at which time the Company will be able to estimate the expected costs of
compliance and timetable for completion.
<PAGE> 21
Interest and Related Debt Costs. For the nine-month period ended September 30,
1997, interest and amortization of deferred debt issuance costs increased to
$15.7 million from $14.8 million for the comparable 1996 period. During the nine
month period ended September 30, 1997, the Company had weighted average
borrowings of $44.0 million more than the comparable period ended September 30,
1996. Such additional borrowings resulted in additional interest costs of
approximately $1.9 million. This decrease was the result of the Company
eliminating subsidiary indebtedness which carried significantly higher cost of
funds than credit facility borrowings available to the Company at the parent
company level. In addition, the Company utilized funds available under its
revolving credit facility to repurchase approximately $35 million principal
amount of its 9 1/4% Senior Subordinated Notes due 2003 (the "Notes") resulting
in a positive interest arbitrage of approximately 180 basis points which
resulted in the Company realizing approximately $821,000 in interest cost
savings.
For the three month period ended September 30, 1997 and 1996, interest costs
were $5.9 million and $4.8 million, respectively. The increase in costs as a
result of the increase in average borrowings outstanding amounted to
approximately $66.0 million. Also impacting interest costs were the subsidiary
refinancings and the repurchase of the $35.0 million of Notes, which resulted in
an aggregate decline of $200,000 in interest costs.
Income Taxes. The effective tax rates for the nine month and three month periods
ended September 30, 1997, were approximately 37.2% and 32.6%, respectively,
compared to 37.4% and 37.7% for the three month and nine month periods ended
September 30, 1996, respectively. Excluding the impact of $19.1 million of
restructuring charges as well as incremental costs associated with the
restructuring of $3.5 million and transaction costs of $6.6 million, which
combined derive an income tax benefit of $10.2 million, the Company's effective
tax rate would have been 36.6% for the nine month period ended September 30,
1997. The effective rate for all periods presented is higher than the statutory
tax rate primarily due to the non-deductibility of the amortization of costs in
excess of net assets acquired.
Equity in Undistributed Earnings of Unconsolidated Affiliates. SW Financial
reported earnings of $20.7 million and $17.2, as restated, for the nine months
ended September 30, 1997 and 1996, respectively. The Company recognized $16.2
million and $12.8 million of earnings as a result of its economic interest in SW
Financial. The improvement in the results of operations of SW Financial was
primarily related to the reduction in certain deficiency reserves aggregating
$18.1 million as the result of substantial management action taken during the
period to implement a plan which is intended to reduce the losses anticipated to
be suffered on a block of interest sensitive business. Such actions included
contractually allowable reductions in credited rates and increases in cost of
insurance and expense charges. Offsetting such gains were losses suffered on
certain health lines of business aggregating $9.5 million. In addition, for the
nine month period ended September 30, 1997, SW Financial's operating results
were negatively impacted by $700,000 and $1.1 million due to increased goodwill
amortization as a result of final purchase allocations made during 1996 and a
reduction in realized gains from the sale of investments, respectively.
SW Financial reported earnings of $17.7 million and $6.0, as restated, for the
three month periods ended September 30, 1997 and 1996, respectively. The
Company recognized a gain of $13.7 million compared with $4.5 million of income
from SW Financial for 1997 and 1996, respectively. Three month variances trend
with nine month variances as SW Financial primarily realized the impacts
described above during the three month period ended September 30, 1997.
SW Financial continues to monitor emerging losses on certain of its health
products. During the three month period ended September 30, 1997 losses on
certain health lines amounted to $400,000 compared to losses during the six
month period ended June 30, 1997 of $9.1 million and gains during the three
month period ended September 30, 1996 of $600,000. SW Financial recently
instituted a series of management actions including rate increases and policy
conversion options intended to mitigate future losses. There can be no assurance
that such actions will reduce losses in future periods.
Pro forma Analysis of the Results of Operations. The following pro forma
results of operations has been prepared to aid in comparative analysis of the
nine month periods ended September 30, 1997 and 1996. The pro forma results
indicated below eliminate the impact of the restructuring charge and
additionally eliminate the impact of certain losses, non-comparative charges
and reserve adjustments associated with the Company's economic interest in SW
Financial. Also, included in the following pro forma statement of operations is
the reclassification of amortization of the present value of insurance in force
and deferred acquisition costs associated with gains on invested assets during
the nine month period ended September 30, 1997 (See: Management Discussion and
Analysis Result of Operations - realized investment gains and losses). The
Company did not "unlock" amortization of the present value of insurance in
force or deferred acquisition costs during 1996 for realized investment gains.
<PAGE> 22
<TABLE>
<CAPTION>
NINE MONTH
NINE MONTH PERIOD ENDED PERIOD ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
-------------------------------------------------------------------------------------------
RESTRUCTURING AND AS REPORTED COMPARATIVE COMPARATIVE
AS REPORTED TRANSACTION COSTS (NET) ADJUSTMENTS PRO FORMA AS RESTATED
------------- ----------------- ----------- ------------- ------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
OPERATING INFORMATION:
Revenues:
Premiums, principally
Accident and sickness $194,668 -- $194,668 -- $194,668 $189,417
Interest sensitive product
Policy charges 68,688 -- 68,688 -- 68,688 67,752
Net investment income 206,256 -- 206,256 -- 206,256 141,407
Other income 20,313 -- 20,313 -- 20,313 16,793
Net gains from sale of
investments 14,767 -- 14,767 4,729 10,038 84
-------- -------- -------- --------
Total revenues 504,692 504,692 499,963 $415,453
-------- -------- -------- --------
Benefits and expenses:
Claims incurred 146,238 -- 146,238 -- 146,238 137,124
Change in liability for
future policy benefits
and other policy benefits 78,823 -- 78,823 -- 78,823 47,940
Amortization of present value
of insurance in force and
deferred policy acquisition
costs 64,298 -- 64,298 4,729 59,569 42,927
Amortization of costs in
excess of net assets
acquired 7,460 -- 7,460 -- 7,460 6,256
Underwriting and other
administrative expenses 101,058 10,110 90,948 -- 90,948 85,744
Interest and amortization of
deferred debt issuance costs 15,719 -- 15,719 -- 15,719 14,759
Restructuring charge 19,071 19,071 -- -- -- --
-------- -------- -------- --------
Total benefits and
expenses 432,667 403,486 398,757 334,750
-------- -------- -------- --------
Income before income taxes,
undistributed earnings in
unconsolidated affiliates
and extraordinary charge 72,025 101,206 101,206 80,703
Income taxes 26,783 10,213 36,996 -- 36,996 30,152
-------- -------- -------- --------
Net income before undistributed
earnings in unconsolidated
affiliates and extraordinary
charge 45,242 64,210 64,210 50,551
Undistributed earnings
in unconsolidated
affiliates 16,158 -- 16,158 (3,102)(1) 13,056 12,834
-------- -------- -------- --------
Net income before
extraordinary charge 61,400 80,368 77,266 63,385
Extraordinary charge -- -- -- -- -- (1,138)
-------- -------- -------- --------
Net income 61,400 80,368 77,266 62,247
Preferred stock dividend
requirements 14,685 -- 14,685 -- 14,685 9,636
-------- -------- -------- --------
Net income applicable to
common stock $ 46,715 $ 65,683 $ 62,581 $ 52,611
======== ======== ======== ========
PER SHARE INFORMATION:
Primary:
Net income applicable to
common stock before
extraordinary charge $ 1.61 $ 2.27 $ 2.16 $ 1.92
Extraordinary charge -- -- -- (0.04)
-------- -------- -------- --------
Net income applicable to
common stock $ 1.61 $ 2.27 $ 2.16 $ 1.88
======== ======== ======== ========
Weighted average primary
shares outstanding
(in thousands) 28,954 28,954 28,954 28,038
======== ======== ======== ========
Fully diluted:
Net income applicable to
common stock before
extraordinary charge $ 1.57 $ 2.07 $ 1.99 $ 1.70
Extraordinary charge -- -- -- (0.03)
-------- -------- -------- --------
Net income applicable to
common stock $ 1.57 $ 2.07 $ 1.99 $ 1.67
======== ======== ======== ========
Weighted average fully
diluted shares outstanding
(in thousands) 38,161 38,161 38,161 33,993
======== ======== ======== ========
</TABLE>
<PAGE> 23
(1) During the period SW Financial incurred losses aggregating approximately
$9.5 million as the result of additional analysis on certain health
insurance lines of business. SW Financial anticipates that it may incur
additional losses for the remainder of 1997 on the health line of business
until its policy conversion and rate increase program is fully implemented.
Also during the period ended September 30, 1997, SW Financial began
implementation of a management action plan which resulted in a reduction of
$18.1 million of deficiency reserves associated with an interest sensitive
block of business. In addition, SW Financial incurred $700,000 of
additional goodwill amortization during the nine month period ended
September 30, 1997, as compared to September 30, 1996. Such amortization
was the result of final purchase allocations by SW Financial. For the nine
month period ended September 30, 1997, SW Financial realized $1.1 million
less in gains from the sales of investments. The impact of the above items
on the Company's results of operations was an increase of $3.1 million.
<PAGE> 24
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Refer to Part II, Item 1 of the Company's Quarterly Report on Form 10-Q for the
three month period ended March 31, 1997, for information regarding the Tozour
Case and Miller Complaint.
The Company is a party to various pending or threatened legal actions arising
in the ordinary course of business some of which include allegations of
insufficient policy illustration and agent misrepresentations. Although the
outcome of such actions is not presently determinable, management does not
believe that such matters, individually or in the aggregate, would have a
material adverse effect on the Company's financial position or results of
operations if resolved against the Company.
ITEM 5. OTHER INFORMATION
Securities and Exchange Commission ("SEC") Review of Historical Financial
Statements
As part of the Preliminary Joint Proxy Statement and Prospectus review process
related to the merger with Washington National Corporation and the acquisitions
of the controlling interest in SW Financial and the Fickes and Stone
Knightsbridge Interests, the SEC has been reviewing the Company's historical
financial statements.
Due to the nature of the accounting comments raised by the SEC, the Company
commenced a thorough review of its historical accounting policies and
practices, conducted under the supervision of the Audit Committee of the Board
of Directors and with the assistance of the Company's internal audit staff and
KPMG Peat Marwick LLP ("KPMG"), the Company's independent auditors. Based upon
that review, the Company and KPMG concluded that, notwithstanding certain
accounting errors identified by the Company during the review process, the
Company's financial statements were fairly presented for all periods under
review. The Company advised the SEC of the results of its review at the end of
June 1997, and subsequently provided additional information requested by the
SEC. On August 14, 1997, the SEC notified the Company that it was unable to
concur with certain of the Company's conclusions. The SEC requested that the
Company correct its financial statements to eliminate the accounting errors
identified during the Company's internal review and to revise its historical
financial statements in certain other respects.
The Company has restated its consolidated financial statements for each of the
years in the three year period ended December 31, 1996, as well as the three
month period ended March 31, 1997, the three and six month periods ended June
30, 1997, and the three and nine month periods ended September 30, 1996. For
additional information concerning the restatement refer the Company's report on
Form 8-K filed November 14, 1997.
Pending Merger, Acquisition and Related Transaction
On August 30, 1997, the merger agreement between Washington National and the
Company terminated.
The Company's pending acquisitions of the Controlling Interest in Southwestern
Financial Corporation and Subsidiaries and the Fickes and Stone Knightsbridge
Interests, as well as the annual stockholders' meeting, are also being delayed
pending completion of the SEC's Preliminary Joint Proxy Statement and
Prospectus review process relating to those transactions, including a review of
the Company's historical financial statements. The Company intends to proceed
with these matters during the fourth quarter of 1997.
<PAGE> 25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
10.1 Note Purchase, Release and Settlement Agreement, dated July
13, 1997, executed by Long Star Liquidating Trust, PennCorp
Financial Group, Inc. and Southwestern Financial Corporation.
11.1 Computations of earnings per share
15.1 Independent Auditors' Review Report*
27 Financial Data Schedule
</TABLE>
* Such exhibit is incorporated by reference to page 14 of this Form 10-Q.
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the quarter ended September
30, 1997.
<PAGE> 26
SIGNATURES
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 hereunto duly authorized.
PENNCORP FINANCIAL GROUP, INC.
(The Registrant)
Dated: November 14, 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)
<PAGE> 27
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
10.1 Note Purchase, Release and Settlement Agreement, dated July 13,
1997, executed by Long Star Liquidating Trust, PennCorp Financial
Group, Inc. and Southwestern Financial Corporation.
11.1 Computations of earnings per share
15.1 Independent Auditors' Review Report*
27 Financial Data Schedule
</TABLE>
* Such exhibit is incorporated by reference to page 14 of this Form 10-Q.
<PAGE> 1
EXHIBIT 10.1
NOTE PURCHASE, RELEASE AND SETTLEMENT AGREEMENT
This Note Purchase, Release and Settlement Agreement (this
"Agreement") is entered into as of the 31st day of July, 1997, by and among
Lone Star Liquidating Trust ("Seller") and PennCorp Financial Group, Inc., a
Delaware corporation ("Buyer"), and Southwestern Financial Corporation, a
Delaware corporation ("SFC").
WHEREAS, Buyer has advised Seller that it is seeking to become the
controlling stockholder of SFC;
WHEREAS, Seller is the holder of a $40,000,000 Convertible
Subordinated Reset Note due 2005 of SFC (the "Note");
WHEREAS, Buyer is desirous of purchasing the Note, and Seller is
desirous of selling the Note;
WHEREAS, pursuant to that certain Escrow Agreement, dated as of
December 13, 1995 (the "Escrow Agreement"), Seller is the owner of all of the
funds held in escrow (the "Escrowed Funds") with respect to certain asserted
and potential indemnity claims of the Buyer Indemnitees (as defined in Section
8.1(a) of the Purchase Agreement among I.C.H. Corporation, SWL Holding
Corporation, Care Financial Corporation, Facilities Management Installation,
Inc., SFC, Southwest Financial Services Corporation and Buyer, dated December
1, 1995 (the "Purchase Agreement")); and
WHEREAS, Buyer, Seller and SFC are desirous of resolving all claims
and liabilities, known or unknown, liquidated or contingent, that may exist
between (a) Seller and the Seller Indemnitees (as defined in Section 8.1(b) of
the Purchase Agreement) and (b) Buyer, SFC and the Buyer Indemnitees;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements contained herein and intending to be legally bound
hereby, Seller, Buyer and SFC hereby agree as follows:
ARTICLE 1.
PURCHASE AND SALE OF NOTE
1.01 Purchase of Note. Subject to the terms and conditions set
forth herein, Seller hereby agrees to sell, and Buyer hereby agrees to
purchase, the Note for a price of $40,000,000 plus accrued interest on the Note
through the date of the Closing (as defined below) payable at the Closing by
wire transfer to an account designated by Seller, upon delivery of the Note,
duly endorsed for transfer by the record holder thereof (or accompanied by
documentation in form and substance satisfactory to Buyer to permit Seller to
endorse the Note for transfer), by Seller to Buyer.
1.02 Closing. The closing ("Closing") of the sale of the Note
shall be held on August 4, 1997 at 9:00 a.m. at the offices of Gibson, Dunn &
Crutcher LLP, 1717 Main Street, Suite 5400, Dallas, Texas 75201.
EXECUTION VERSION
<PAGE> 2
ARTICLE 2.
RELEASE OF ESCROWED FUNDS
2.01 Release of Escrowed Funds. Buyer hereby agrees to cause to be
released to Seller all Escrowed Funds (including any investment earnings with
respect thereto) as soon as practicable.
ARTICLE 3.
SETTLEMENT OF CERTAIN OTHER SELLER CLAIMS
3.01 Settlement. On the date of the Closing, Buyer shall cause
Southwestern Life Insurance Company to pay to Seller, in satisfaction of
certain income tax liabilities in connection with the consummation of the
transactions contemplated by the Purchase Agreement, $2,832,275 by wire
transfer to an account designated by Seller.
ARTICLE 4.
REPRESENTATIONS AND WARRANTIES
4.01 Representations and Warranties. To induce the execution and
performance of this Agreement, Seller represents and warrants to Buyer and SFC,
and each of Buyer and SFC represents and warrants to Seller that:
(a) Authorization and Power. Each party has the
corporate or trust power, as the case may be, and requisite authority,
and has taken all action necessary, to execute, deliver, and perform
this Agreement.
(b) No Conflicts or Consents. The execution and delivery
of this Agreement, the consummation of any of the transactions herein
contemplated, and compliance with the terms and provisions hereof,
will not contravene or materially conflict with any provision of
applicable law to which such party is subject or any material
judgment, license, order or permit applicable to such party, or any
material contract, lease, indenture, loan agreement, mortgage, deed of
trust, or other agreement or instrument to which such party is a party
or by which it may be bound, or violate any provision of the
organizational documents of such party. No consent, approval,
authorization, or order of any governmental authority, tribunal or
other person is required in connection with the execution and delivery
of this Agreement, or the consummation of the transactions
contemplated hereby.
(c) Enforceable Obligations. This Agreement has been
duly executed and delivered and is the legal and binding obligation of
such party, enforceable in accordance with its respective terms,
except as limited by all applicable liquidation, conservatorship,
bankruptcy, moratorium, arrangement, receivership, insolvency,
reorganization, fraudulent conveyance, or similar laws from time to
time affecting the rights of creditors generally.
4.02 Seller Representation. Seller represents and warrants to
Buyer that (a) it has good title to the Note, free of all liens, claims, or
encumbrances, other than any lien, claim or encumbrance that could be asserted
by Buyer or SFC, and (b) it is the beneficial owner of the
- 2 -
NOTE PURCHASE, RELEASE AND SETTLEMENT AGREEMENT
<PAGE> 3
Note. Except as set forth on Schedule 4.02 hereof and except for any
occurrence, event or other matter of which SFC has knowledge, Seller represents
and warrants that neither Susan A. Brown, Seller's managing trustee, nor Rodney
Moore, Sr. has knowledge of any occurrence, event, or other matter which could
give rise to a claim for indemnity under the Purchase Agreement, the Note or
the Escrow Agreement that has not previously been asserted by SFC, Buyer or any
Buyer Indemnitee.
4.03 Survival of Representations and Warranties. All
representations, warranties and convenants herein shall survive the Closing.
ARTICLE 5.
RELEASES
5.01 Buyer and SFC Release. Buyer and SFC, and Buyer and SFC on
behalf of the Buyer Indemnitees, hereby release, terminate, and forever
discharge Seller (including the managing trustee, supervisory trustees, agents,
representatives, employees, officers, successors, assigns, transferees,
subsidiaries, parents, or other affiliates of Seller) from any and all claims,
debts, liens, demands, liabilities, obligations, promises, acts, agreements,
costs and expenses (including, but not limited to, attorneys' fees), contracts,
controversies, guarantees, damages, judgments and causes of action of any
nature or kind whatsoever, whether known or unknown, suspected or unsuspected,
asserted or unasserted, now existing or arising in the future, concerning or
relating to the transactions contemplated by, or indemnities arising out of,
the Purchase Agreement, the Escrow Agreement and the Note; provided, however,
that the foregoing release shall not apply to (i) any breach by Seller of the
terms of this Agreement, or (ii) any indemnity claims that current or former
officers or directors of I.C.H. Corporation, SWL Holding Corporation, Care
Financial Corporation, or any of their respective subsidiaries may have against
I.C.H. Corporation, SWL Holding Corporation, Care Financial Corporation, or any
of their respective subsidiaries.
5.02 Seller Release. Seller, and Seller on behalf of the Seller
Indemnitees, hereby releases, terminates and forever discharges Buyer and SFC
(including their respective agents, representatives, employees, officers,
directors, partners, successors, assigns, transferees, subsidiaries, parents
and corporate or other affiliates) from any and all claims, debts, liens,
demands, liabilities, obligations, promises, acts, agreements, costs and
expenses (including, but not limited to, attorneys' fees), contracts,
controversies, guarantees, damages, judgments, and causes of action of any
nature or kind whatsoever, whether known or unknown, suspected or unsuspected,
asserted or unasserted, now existing or arising in the future, concerning or
relating to the transactions contemplated by, or indemnities arising out of,
the Purchase Agreement, the Escrow Agreement and the Note or arising out of the
performance by Buyer's affiliates of their obligations with respect to a policy
claim asserted by Anna Taylor against Bankers Multiple Line, Inc. in Arizona;
provided, however, that the foregoing release shall not apply to any breach by
Buyer or SFC of the terms of this Agreement.
5.03 General. The terms of this Article 5 are contractual, not a
mere recital, and are the result of negotiations among the parties to this
Agreement. The parties acknowledge that this
- 3 -
NOTE PURCHASE, RELEASE AND SETTLEMENT AGREEMENT
<PAGE> 4
Agreement is executed voluntarily and without duress or undue influence. The
releases set forth in this Article 5 and the timely release of the Escrowed
Funds constitute a material part of the consideration to be received by each
party hereto for its obligations hereunder.
ARTICLE 6.
COVENANTS
6.01 Continuing Compliance. Buyer and SFC agree (a) to execute and
deliver to the Escrow Agent under the Escrow Agreement all documents necessary
or desirable to cause the timely release of the Escrowed Funds as soon as
practicable including, without limitation, the certificate set forth in Exhibit
A hereto, and (b) not to take or fail to take any action which would impede or
delay the release of the Escrowed Funds.
6.02 General Compliance. Each party hereto agrees to use its best
efforts to cause the conditions which are subject to its control to be
satisfied on the date of the Closing.
ARTICLE 7.
INDEMNITY
7.01 Buyer Indemnity. Buyer shall defend, indemnify and hold
harmless Seller, its managing trustee, supervisory trustees, agents,
representatives, employees, officers, successors, assigns, transferees,
subsidiaries, parents and other affiliates of Seller against any claim or
expense that is asserted by a Buyer Indemnitee which has not delivered a
release pursuant to Section 5.01 and which claim would have been released
pursuant to Section 5.01 if it had been asserted by Buyer or SFC; provided,
however, that Section 7.01 shall not apply to any claim described in Section
5.01(ii) of this Agreement.
7.02 Seller Indemnity. Seller shall defend, indemnify and hold
harmless Buyer, its agents, representatives, employees, officers, successors,
assigns, transferees, subsidiaries, parents and other affiliates of Buyer
against any claim or expense that is asserted by a Seller Indemnitee which has
not delivered a release pursuant to Section 5.02 and which claim would have
been released pursuant to Section 5.02 if it had been asserted by Seller.
ARTICLE 8.
MISCELLANEOUS
8.01 Amendment. No amendment or waiver of any provision of this
Agreement shall in any circumstance be effective unless the same shall be in
writing and signed by the parties to this Agreement and then such amendment,
waiver or consent shall be effective only in the specific instance and for the
specific purpose for which given.
8.02 No Waiver; Remedies. No failure on the part of a party to
exercise, and no delay on the part of a party in exercising, any right
hereunder shall operate as a waiver thereof; nor shall any single or partial
exercise of any right hereunder preclude any other or further exercise thereof
or the exercise of any other right. The remedies herein provided are
cumulative and not exclusive of any remedies provided by law.
- 4 -
NOTE PURCHASE, RELEASE AND SETTLEMENT AGREEMENT
<PAGE> 5
8.03 Costs and Expenses. Each party shall be responsible for its
own fees and expenses in connection with the negotiation, closing and
performance of the transactions contemplated hereby.
8.04 Binding Effect; Governing Law. This Agreement shall be
binding upon and inure to the benefit of the parties and their respective
successors and assigns. This Agreement shall be governed by, and construed in
accordance with, the substantive, internal laws of the State of Texas without
giving reference to principles of conflicts of law.
8.05 Execution. This Agreement may be executed in one or more
counterparts, which together shall constitute but one and the same instrument.
It shall not be necessary for each party to sign each counterpart so long as
each party has signed at least one counterpart. If any party delivers a
facsimile signature of this Agreement, such facsimile signature shall be fully
binding on such party but such party shall promptly deliver a manually executed
original of its execution of this Agreement.
8.06 Arbitration. In the event of any claim, controversy or
dispute arising out of or relating to this Agreement that cannot be resolved by
the parties, such claim, controversy or dispute shall be determined solely and
exclusively by arbitration in accordance with the rules of the American
Arbitration Association. Any such arbitration proceedings shall be held in
Dallas, Texas. Judgment upon any award may be entered in any court having
jurisdiction thereof.
[SIGNATURES ON NEXT PAGE]
- 5 -
NOTE PURCHASE, RELEASE AND SETTLEMENT AGREEMENT
<PAGE> 6
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their respective officers or trustee thereunto duly authorized,
as of the date first above written.
LONE STAR LIQUIDATING TRUST
By: /s/ SUSAN A. BROWN
-----------------------------------------
Susan A. Brown
Managing Trustee
PENNCORP FINANCIAL GROUP, INC.
By: /s/ SCOTT D. SILVERMAN
-----------------------------------------
Its: Senior Vice President
----------------------------------------
SOUTHWESTERN FINANCIAL CORPORATION
By: /s/ SCOTT D. SILVERMAN
-----------------------------------------
Its: Senior Vice President
----------------------------------------
<PAGE> 7
SCHEDULE 4.02
POTENTIAL INDEMNIFICATION CLAIMS
1. Claims relating to "Vanishing Premium" allegations in
connection with insurance policies sold by the Acquired Companies.
2. Claims of I.C.H. Corporation which may be acquired by Robert
Shaw or his affiliates.
NOTE PURCHASE, RELEASE AND SETTLEMENT AGREEMENT
<PAGE> 8
EXHIBIT A
LONE STAR LIQUIDATING TRUST
AND
SOUTHWESTERN FINANCIAL CORPORATION
CERTIFICATE FOR RELEASE OF
FUNDS IN ESCROW ACCOUNT
The undersigned, a duly authorized officer and trustee, respectively, of
Southwestern Financial Corporation, a Delaware corporation (the "Buyer"), and
Lone Star Liquidating Trust as successor to the rights of I.C.H. Corporation
(the "Seller") hereby certify, with reference to the Escrow Agreement (the
"Escrow Agreement"), dated as of December 13, 1995, among the Seller,
Facilities Management Installation, Inc., SWL Holding Corporation, Care
Financial Corporation, the Buyer and the Escrow Agent, as follows (capitalized
terms used herein without definition having the respective meanings specified
in the Escrow Agreement):
(1) The conditions set forth in Section 8.2(c) of the Purchase
Agreement for release of all funds in the Escrow Account to the Seller
have been satisfied.
(2) The sum of all amounts now remaining in the Escrow Account
is as follows: approximately $39,174,924.61.
(3) The amount of all pending claims by Buyer and Buyer Indemnities
against the Seller or any Selling Subsidiary for indemnification under the
Purchase Agreement is as follows: $0.00.
(4) The amount to be released to the Seller from the Escrow Account
under Section 3(a) of the Escrow Agreement pursuant to this certificate is
approximately $39,174,924.61 (less any unpaid fees and expenses of the
Escrow Agent) which represents the sum of the amount specified in
paragraph 2, minus the amount specified in paragraph 3.
(5) The amount requested to be paid pursuant to this Certificate is
to be transferred by wire transfer of immediately available funds to Lone
Star Liquidating Trust's account at Bank One Texas, Dallas, Texas (ABA
Routing Number 111000614), Account Number 1822928030.
[SIGNATURES ON NEXT PAGE]
<PAGE> 9
IN WITNESS WHEREOF, the Buyer and the Seller have executed and delivered
this Certificate as of the ___ day of _____________, 1997.
LONE STAR LIQUIDATING TRUST
By:
-----------------------
Susan A. Brown
Managing Trustee
SOUTHWESTERN FINANCIAL
CORPORATION
By:
-----------------------------
Name:
----------------------
Title:
---------------------
2
<PAGE> 1
EXHIBIT 11.1
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
------------------------------ -----------------------------
THREE MONTH PERIODS ENDED NINE MONTH PERIODS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ -----------------------------
(AS RESTATED) (AS RESTATED)
1997 1996 1997 1996
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Primary net income applicable to common stock:
Net income applicable to common stock $ 26,070 $ 18,702 $ 46,715 $ 52,611
Extraordinary charge -- 322 -- 1,138
---------- --------- ----------- -----------
$ 26,070 $ 19,024 $ 46,715 $ 53,749
========== ========= =========== ===========
Fully diluted net income applicable to common stock:
Net income applicable to common stock $ 26,070 $ 18,702 $ 46,715 $ 52,611
Extraordinary charge -- 322 -- 1,138
Common stock equivalents:
Convertible preferred stock dividend requirements 4,457 3,450 13,171 7,332
---------- --------- ----------- -----------
$ 30,527 $ 22,474 $ 59,886 $ 61,081
========== ========= =========== ===========
</TABLE>
<TABLE>
<CAPTION>
-------------------------------- ------------------------------
THREE MONTH PERIODS ENDED NINE MONTH PERIODS ENDED
--------------------------------- ------------------------------
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- -----------------------------
1997 1996 1997 1996
--------------- ---------------- ----------------- ----------
<S> <C> <C> <C> <C>
Primary:
Shares outstanding beginning of period 28,648 22,880 28,648 22,880
Issuance of 5,131 shares on March 5, 1996 -- 5,131 -- 3,914
Incremental shares applicable to Stock Warrants/Stock Options 1,004 1,676 993 1,434
Treasury shares (772) (190) (687) (190)
-------- -------- -------- --------
28,880 29,497 28,954 28,038
======== ======== ======== ========
Fully diluted:
Shares outstanding beginning of period 28,648 22,880 28,648 22,880
Issuance of 5,131 shares on March 5, 1996 -- 5,131 -- 3,914
Incremental shares applicable to Stock Warrants/Stock Options 1,004 1,722 993 1,477
Treasury shares (772) (190) (687) (190)
Conversion of 2,300 shares of $3.375 Convertible Preferred
Stock at a rate of 2.2123 common shares to 1 preferred share 5,088 5,088 5,088 5,088
Conversion of 2,875 shares of $3.50 Series II Convertible Preferred
Stock at a rate of 1.4327 common shares to 1 preferred share 4,119 2,471 4,119 824
-------- -------- -------- --------
38,087 37,102 38,161 33,993
======== ======== ======== ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<DEBT-HELD-FOR-SALE> 3,022,894
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19,430
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263,356
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