<PAGE> 1
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SCHEDULE 14A/A
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
FILED BY THE REGISTRANT [X]
FILED BY A PARTY OTHER THAN THE REGISTRANT [ ]
CHECK THE APPROPRIATE BOX:
[ ] PRELIMINARY PROXY STATEMENT [ ] CONFIDENTIAL, FOR
USE OF THE
COMMISSION ONLY (AS PERMITTED BY
RULE 14A-6(E)(2))
[X] DEFINITIVE PROXY STATEMENT
[ ] DEFINITIVE ADDITIONAL MATERIALS
[ ] SOLICITING MATERIAL PURSUANT TO RULE 14A-11(C) OR RULE 14A-12
PENNCORP FINANCIAL GROUP, INC.
(Name of Registrant as Specified in its Charter)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
(1) Title of each class of securities to which transaction applies: (i)
Common Stock, par value $.01 per share, of Southwestern Financial Corporation
(the "Southwestern Financial Shares") to be acquired by PennCorp Financial
Group, Inc.; and (ii) Members Interests, no par value, in Knightsbridge Capital,
L.L.C., Knightsbridge Management, L.L.C. and Knightsbridge Consultants, L.L.C.
(the "Knightsbridge Interests") to be acquired by PennCorp Financial Group, Inc.
(2) Aggregate number of securities to which transaction applies: (i)
4,140,417, being the maximum number of Southwestern Financial Shares to be
acquired by PennCorp Financial Group, Inc. in the transaction and (iii) 100% of
the Knightsbridge Interests.
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11: The amount on which the filing fee is
calculated was determined pursuant to Rule 0-11(a)(4) and (c) of the Exchange
Act by multiplying (A) 1/50th of 1% by the product of (i) $9.95, being the book
value per Southwestern Financial Share, and (ii) 4,140,417, the number of
Southwestern Financial Shares to which the transaction applies (assuming the
exercise of outstanding common stock purchase warrants); and (B) 1/50th of 1% by
$3,333,333.33, being one-third of the stated value being paid for the
Knightsbridge Interests.
(4) Proposed maximum aggregate value of transactions: $44,530,482.48, being
the sum of (A) $41,197,149.15 plus (B) $3,333,333.33, determined based on 3(A)
and (B) above.
(5) Total fee paid: $77,329.54
[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration No.:
(3) Filing Party:
(4) Date Filed:
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<PAGE> 2
PENNCORP FINANCIAL GROUP, INC.
745 FIFTH AVENUE
NEW YORK, NEW YORK 10151
---------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON DECEMBER 31, 1997
---------------------
To the Stockholders of
PennCorp Financial Group, Inc.:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders (the "Annual
Meeting") of PennCorp Financial Group, Inc. (the "Company") will be held on
December 31, 1997 at 10:00 A.M., local time, at 3 Bethesda Metro Center,
Bethesda, Maryland 20814 for the following purposes:
1. To elect three Class II directors to hold office until the 2000
annual meeting of stockholders and/or until their respective successors are
elected and qualified;
2. To approve the adoption of certain amendments to the Company's 1996
Stock Award and Stock Option Plan;
3. To approve an amendment to the Company's Second Restated
Certificate of Incorporation ("Certificate of Incorporation") increasing
the number of its authorized shares of common stock from 50,000,000 to
100,000,000;
4. To approve an amendment to the Certificate of Incorporation to
reduce the minimum required number of members constituting the Company's
Board of Directors from nine to seven;
5. To approve the purchase by the Company, upon the terms and
conditions described in the accompanying Proxy Statement, of The Fickes and
Stone Knightsbridge Interests (as defined in the Proxy Statement);
6. To approve the purchase by the Company, upon the terms and
conditions described in the accompanying Proxy Statement, of all the
outstanding common stock and common stock warrants of Southwestern
Financial Corporation not already owned by PennCorp;
7. To adjourn the Annual Meeting in the event that there are not
sufficient votes to approve the above proposals at the time of the Annual
Meeting; and
8. To transact such other business as may properly come before the
meeting or any adjournment thereof.
The Board of Directors has fixed the close of business on November 24,
1997, as the record date for determining the stockholders entitled to notice of,
and to vote at, the meeting or any adjournment thereof. A list of such
stockholders will be maintained at the offices of PennCorp Financial Inc., 3
Bethesda Metro Center, Bethesda, Maryland 20814, during the ten-day period prior
to the date of the meeting and will be available for inspection by stockholders,
for any purpose germane to the meeting, during ordinary business hours.
You are cordially invited to attend the Annual Meeting. WHETHER OR NOT YOU
PLAN TO ATTEND THE MEETING IN PERSON, PLEASE DATE AND SIGN THE ENCLOSED PROXY
CARD AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE. IN THE EVENT A STOCKHOLDER
DECIDES TO ATTEND THE MEETING, THAT STOCKHOLDER MAY REVOKE A PREVIOUSLY GIVEN
PROXY AND VOTE IN PERSON.
By Order of the Board of Directors,
SCOTT D. SILVERMAN
Secretary
December 2, 1997
<PAGE> 3
PENNCORP FINANCIAL GROUP, INC.
745 FIFTH AVENUE
NEW YORK, NEW YORK 10151
212-832-0700
---------------------
PROXY STATEMENT
---------------------
This Proxy Statement is being furnished in connection with the solicitation
by the Board of Directors of PennCorp Financial Group, Inc. (the "Company" or
"PennCorp") of proxies to be used at the Annual Meeting of Stockholders to be
held at 3 Bethesda Metro Center, Bethesda, Maryland 20814, on December 31, 1997
at 10:00 A.M., local time, and at any and all adjournments thereof. In addition
to the solicitation of proxies by mail, directors, officers and employees of the
Company may solicit proxies personally, by telephone, telefax or otherwise,
without receiving additional compensation therefor. The expenses of all such
solicitations, including the cost of preparing, printing and mailing this Proxy
Statement, will be borne by the Company. In addition, the Company has retained
Georgeson & Company Inc. as its proxy solicitor for the meeting, which will
receive a fee of $10,000 (plus reimbursement of out-of-pocket expenses) for its
services. The Company, upon request, will reimburse brokers, banks and other
nominees for their reasonable out-of-pocket expenses in forwarding proxy
materials to beneficial owners of the Company's Common Stock. This Proxy
Statement and the accompanying proxy card are first being mailed to stockholders
of the Company on or about December 2, 1997. The Company's 1996 Annual Report to
Shareholders and Quarterly Report on Form 10-Q for the quarter ended September
30, 1997 are being mailed to stockholders together with this Proxy Statement.
If the enclosed proxy card is validly executed, dated and returned, it will
be voted as directed by the stockholder. If no directions are given, proxies
will be voted (i) FOR election as directors of all of the nominees specified
herein; (ii) FOR the approval of the adoption of certain amendments to the
Company's 1996 Stock Award and Stock Option Plan (the "Stock Plan"); (iii) FOR
the approval of an amendment to PennCorp's Second Restated Certificate of
Incorporation, as amended (the "Certificate of Incorporation"), to increase the
number of authorized shares of Common Stock from 50,000,000 to 100,000,000; (iv)
FOR the approval of an amendment to the Certificate of Incorporation to reduce
the minimum required number of members constituting the Board of Directors from
nine to seven; (v) FOR the approval of the acquisition by PennCorp, upon the
terms and conditions described herein, of The Fickes and Stone Knightsbridge
Interests (as defined); (vi) FOR the approval of the acquisition by PennCorp,
upon the terms and conditions described herein, of all the outstanding common
stock and common stock warrants (the "SW Financial Controlling Interest") of
Southwestern Financial Corporation, a Delaware corporation ("SW Financial"), not
currently owned by the Company; (vii) FOR the adjournment of the Annual Meeting
in the event that there are not sufficient votes to approve the foregoing
proposals at the time of the Annual Meeting; and (viii) in accordance with the
discretion of the named attorneys-in-fact on other matters, if any, properly
brought before the meeting or any adjournment thereof. A proxy may be revoked at
any time, insofar as the authority granted thereby has not been exercised at the
Annual Meeting, by filing with the Secretary of the Company a written revocation
or a duly executed proxy card bearing a later date. Any stockholder present at
the meeting may vote personally on all matters brought before the meeting and,
in that event, such stockholder's proxy will not be used at the meeting by
holders of the proxy. Attendance at the Annual Meeting, in and of itself, will
not constitute a revocation of a previously given proxy.
Only stockholders of record as of the close of business on November 24,
1997 (the "Record Date") are entitled to vote at the meeting. Holders of Common
Stock are entitled to one vote for each share held of record. On November 24,
1997, the Company had outstanding and entitled to vote at the Annual Meeting
28,085,617 shares of Common Stock. A majority of those shares present in person
or by proxy at the Annual Meeting will constitute a quorum to transact business
at the meeting. All directors and executive officers of the Company are expected
to vote, or cause to be voted, all shares of Common Stock over which they
exercise voting control (an aggregate of 1,488,001 shares of Common Stock or
approximately 5.3% of the outstanding shares of Common Stock on the Record Date)
FOR the approval of each of the proposals being submitted at the Annual Meeting,
except that Messrs. Stone, Fickes and Greenberg will abstain from voting on
Proposal No. 5 and Proposal No. 6.
<PAGE> 4
THE PENNCORP ANNUAL MEETING
GENERAL
This Proxy Statement is being furnished to PennCorp common stockholders in
connection with the solicitation of proxies by the Board of Directors of the
Company (the "PennCorp Board") for use at the 1997 Annual Meeting of
Stockholders. Each copy of this Proxy Statement mailed to PennCorp common
stockholders is accompanied by a form of proxy for use at the Annual Meeting.
The Annual Meeting is scheduled to be held on December 31, 1997, at 10:00 a.m.,
local time, at 3 Bethesda Metro Center, Bethesda, Maryland 20814.
PENNCORP STOCKHOLDERS ARE REQUESTED TO COMPLETE, SIGN AND DATE THE ACCOMPANYING
PROXY AND RETURN IT PROMPTLY TO PENNCORP IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
PURPOSE OF THE ANNUAL MEETING
At the Annual Meeting, PennCorp common stockholders will be asked to
consider and vote upon the following proposals and to transact such other
business as may properly come before the meeting.
Proposal No. 1 -- Election of Class II Directors. The PennCorp Board has
nominated the persons named elsewhere herein to serve as Class II directors of
the Corporation, to serve until the 2000 annual meeting of Stockholders or until
their earlier death, resignation or retirement. THE PENNCORP BOARD UNANIMOUSLY
RECOMMENDS THAT PENNCORP STOCKHOLDERS VOTE FOR THE NOMINEES SET FORTH HEREIN.
See "PROPOSAL NUMBER 1 -- Election of Class II Directors."
Proposal No. 2 -- Approval of Certain Amendments to the Company's 1996
Stock Award and Stock Option Plan. The PennCorp Board proposes to amend the
Stock Plan as described further herein. THE PENNCORP BOARD UNANIMOUSLY
RECOMMENDS THAT PENNCORP STOCKHOLDERS VOTE FOR THE AMENDMENT OF THE STOCK PLAN.
See "PROPOSAL NUMBER 2 -- Approval of Certain Amendments to the Company's 1996
Stock Award and Stock Option Plan."
Proposal No. 3 -- The Amendment to the Certificate of Incorporation to
Increase the Authorized Common Stock. The PennCorp Board proposes to amend the
Certificate of Incorporation to increase the Company's authorized common stock
from 50,000,000 shares to 100,000,000 shares. The PennCorp Board has concluded
that the amendment to the Certificate of Incorporation is in the best interests
of PennCorp and its stockholders. THE PENNCORP BOARD UNANIMOUSLY RECOMMENDS THAT
PENNCORP STOCKHOLDERS VOTE FOR THE APPROVAL OF THE CHARTER AMENDMENT. See
"PROPOSAL NUMBER 3 -- Amendment to the Certificate of Incorporation to Increase
the Authorized Common Stock."
Proposal No. 4 -- The Amendment to the Certificate of Incorporation to
Reduce the Minimum Required Number of Directors. The PennCorp Board proposes to
amend the Certificate of Incorporation to reduce the minimum required number of
members constituting the PennCorp Board from nine to seven. The PennCorp Board
has concluded that the amendment to the Certificate of Incorporation is in the
best interests of PennCorp and its stockholders. THE PENNCORP BOARD UNANIMOUSLY
RECOMMENDS THAT PENNCORP STOCKHOLDERS VOTE FOR THE APPROVAL OF THE CHARTER
AMENDMENT. See "PROPOSAL NUMBER 4 -- Amendment to the Company's Certificate of
Incorporation to Reduce the Minimum Required Number of Directors."
Proposal No. 5 -- The Acquisition of The Fickes and Stone Knightsbridge
Interests. As part of a plan to restructure the Company's relationship with
Knightsbridge Capital Fund I, L.P. (the "Knightsbridge Fund") and to consolidate
the outside business interests of Messrs. Stone and Fickes, the Company's two
senior executive officers, under the Company, the PennCorp Board (Messrs. Stone,
Fickes and Greenberg abstaining), based upon the factors described elsewhere
herein, including the fairness opinion of Smith Barney Inc. ("Smith Barney"),
has concluded that the acquisition of The Fickes and Stone Knightsbridge
Interests is fair to and in the best interests of PennCorp and its stockholders.
THE PENNCORP BOARD
2
<PAGE> 5
(MESSRS. STONE, FICKES AND GREENBERG ABSTAINING) UNANIMOUSLY RECOMMENDS THAT
PENNCORP STOCKHOLDERS VOTE FOR THE APPROVAL OF THE ACQUISITION OF THE FICKES AND
STONE KNIGHTSBRIDGE INTERESTS. THE EMPLOYMENT AGREEMENTS OF MESSRS. STONE AND
FICKES ENTERED INTO IN JUNE 1996 AS THE INITIAL STEP IN THE KNIGHTSBRIDGE
RESTRUCTURING WILL BE RESCINDED IF THE ACQUISITION OF THE FICKES AND STONE
KNIGHTSBRIDGE INTERESTS IS NOT APPROVED. IN ADDITION, IF PENNCORP STOCKHOLDERS
DO NOT APPROVE THIS PROPOSAL, THE PROPOSED SETTLEMENT OF CERTAIN PENDING
SHAREHOLDER DERIVATIVE LITIGATION WILL NOT BE CONSUMMATED ON THE TERMS DESCRIBED
HEREIN. See "CERTAIN TRANSACTIONS -- The Knightsbridge Restructuring Plan and
Related Litigation Settlement -- Acquisition of The Fickes and Stone
Knightsbridge Interests"; "-- Proposed Settlement of Shareholder Litigation";
and "PROPOSAL NUMBERS 5 AND 6 -- The PennCorp/Knightsbridge Relationship."
Proposal No. 6 -- The Acquisition of the SW Financial Controlling
Interest. As part of the Knightsbridge restructuring plan, the PennCorp Board
(Messrs. Stone, Fickes and Greenberg abstaining), based upon the factors
described elsewhere herein, including the fairness opinion of Smith Barney, has
concluded that the acquisition of the SW Financial Controlling Interest is fair
to and in the best interests of PennCorp and its stockholders. THE PENNCORP
BOARD (MESSRS. STONE, FICKES AND GREENBERG ABSTAINING) UNANIMOUSLY RECOMMENDS
THAT PENNCORP STOCKHOLDERS VOTE FOR THE APPROVAL OF THE ACQUISITION OF THE SW
FINANCIAL CONTROLLING INTEREST. IF PENNCORP STOCKHOLDERS DO NOT APPROVE THIS
PROPOSAL, THE PROPOSED SETTLEMENT OF CERTAIN PENDING SHAREHOLDER DERIVATIVE
LITIGATION WILL NOT BE CONSUMMATED ON THE TERMS DESCRIBED HEREIN. See "CERTAIN
TRANSACTIONS -- The Knightsbridge Restructuring Plan and Related Litigation
Settlement -- Acquisition of the SW Financial Controlling Interest";
"-- Proposed Settlement of Shareholder Litigation"; and "PROPOSAL NUMBERS 5 and
6 -- The PennCorp/Knightsbridge Relationship."
Proposal No. 7 -- The Adjournment of the Meeting, if Necessary, to Solicit
Further Proxies. The PennCorp Board has unanimously determined that, given the
complexity of the transactions presented for stockholder consideration and the
importance of those transactions to the Company, it is advisable to vest in the
attorneys-in-fact authority to vote for an adjournment of the meeting to permit
the PennCorp Board to solicit further proxies if there are not sufficient votes
at the time of the Annual Meeting to approve any of the foregoing proposals. THE
PENNCORP BOARD UNANIMOUSLY RECOMMENDS THAT PENNCORP STOCKHOLDERS VOTE FOR THE
PROPOSAL TO CONFER AUTHORITY ON THE ATTORNEYS-IN-FACT TO VOTE FOR AN ADJOURNMENT
OF THE MEETING FOR THE PURPOSE SPECIFIED ABOVE. See "PROPOSAL NUMBER 7 -- The
Adjournment Proposal."
RECORD DATE; SHARES OUTSTANDING
The close of business on November 24, 1997 has been fixed as the record
date for the determination of stockholders entitled to notice of and to vote at
the Annual Meeting. On the Record Date, there were 28,085,617 shares of Common
Stock issued and outstanding and held by approximately 300 stockholders of
record. All directors and executive officers of PennCorp are expected to vote,
or cause to be voted, all shares of Common Stock over which they exercise voting
control (an aggregate of 1,488,001 shares of Common Stock or approximately 5.3%
of the outstanding shares of Common Stock on the Record Date) FOR the approval
of each of the proposals being submitted at the Annual Meeting, except that
Messrs. Stone, Fickes and Greenberg will abstain (and will cause their spouses
and certain family trusts controlled by them) from voting on Proposal Numbers 5
and 6.
VOTING AT THE ANNUAL MEETING
The presence, either in person or by proxy, at the Annual Meeting of the
holders of a majority of the issued and outstanding shares of Common Stock is
necessary to constitute a quorum at the Annual Meeting.
Approval of Proposal No. 1. (Election of Class II Directors) will be
determined by plurality vote. Votes may be cast for or votes may be withheld
from each nominee. Abstentions may not be specified for the election of
directors. Therefore, because a single slate of director nominees is being
presented, votes that are withheld will be excluded entirely from the vote and
will have no effect on the outcome. Approval of Proposal
3
<PAGE> 6
No. 2 (Amendment of the 1996 Stock Award and Stock Option Plan) requires the
affirmative vote of at least a majority of the shares of Common Stock present,
in person or by proxy at the Annual Meeting, and entitled to vote. Approval of
each of Proposal No. 3 (Amendment to the Certificate of Incorporation to
Increase the Authorized Common Stock) and Proposal No. 4 (Amendment to the
Certificate of Incorporation to Reduce the Minimum Required Number of Directors)
requires the affirmative vote of at least two-thirds of the issued and
outstanding shares of Common Stock. Approval of each of Proposal No. 5 (The
Acquisition of The Fickes and Stone Knightsbridge Interests), Proposal No. 6
(The Acquisition of the SW Financial Controlling Interest) and Proposal No. 7
(The Adjournment Proposal) requires the affirmative vote of at least a majority
of the shares of Common Stock present, in person or by proxy at the Annual
Meeting, and entitled to vote. Votes may be cast for or against each of
Proposals No. 2 through 7 or stockholders may abstain from voting.
At the Annual Meeting, abstentions and broker non-votes will be counted for
purposes of determining the presence or absence of a quorum. An abstention with
respect to any proposal will have the effect of a vote against that proposal. As
part of the proposed settlement of certain pending shareholder derivative
litigation, Messrs. Stone and Fickes will abstain from voting on Proposal Nos. 5
and 6. Mr. Greenberg has also indicated he will abstain from voting due to his
indirect economic interest in the outcome of the vote on these proposals.
Messrs. Stone, Fickes and Greenberg also will cause their spouses, minor
children and certain family trusts controlled by them to abstain from voting on
these proposals. These abstentions will increase by 1,266,265 shares the number
of affirmative votes necessary for approval of those proposals. A "broker non-
vote" will occur with respect to a given proposal when a broker holding shares
of PennCorp Common Stock in street name (i.e., as nominee for the beneficial
owner) returns an executed proxy (or voting directions) indicating that the
broker does not have discretionary authority to vote on a proposal. Under the
rules of the NYSE, brokers who hold shares of PennCorp Common Stock as nominees
will not have discretionary authority to vote such shares on any of the
proposals being submitted at the Annual Meeting, other than the proposal to
elect Class II directors, in the absence of specific instructions from the
beneficial owners thereof. Under Delaware law, a broker non-vote is counted as
present for quorum purposes but is not considered to be entitled to vote on the
specified matter. Therefore, broker non-votes generally have no effect on the
outcome of a vote on a specific matter. However, because the approval of each of
Proposal No. 3 (Amendment to the Company's Certificate of Incorporation to
Increase the Authorized Common Stock) and Proposal No. 4 (Amendment to the
Certificate of Incorporation to Reduce the Minimum Required Number of Directors)
requires the affirmative vote of a specified minimum percentage of all of the
issued and outstanding shares of PennCorp Common Stock, rather than the vote of
a specified percentage of the shares of PennCorp Common Stock present at the
meeting and entitled to vote, broker non-votes will have the effect of votes
against the adoption of Proposal No. 3 and Proposal No. 4.
Proxies will be voted as specified by PennCorp common stockholders. If a
PennCorp common stockholder does not return a signed proxy, that stockholder's
shares will not be voted. PennCorp common stockholders are urged to mark the
appropriate boxes on the form of proxy enclosed herewith to indicate how their
shares are to be voted. Each PennCorp stockholder is entitled to cast one vote
per share of PennCorp Common Stock on each matter to be voted upon at the Annual
Meeting. If a PennCorp stockholder returns a signed proxy, but does not indicate
how such stockholder's shares are to be voted, the shares of PennCorp Common
Stock represented by the proxy will be voted FOR the adoption of each proposal.
The proxy also confers discretionary authority on the attorneys-in-fact named in
the accompanying form of proxy to vote the shares of PennCorp Common Stock
represented thereby on any other matter that may properly arise at the Annual
Meeting, including consideration of a motion to adjourn or postpone the Annual
Meeting to another time and/or place.
Returning a signed proxy will not affect a PennCorp common stockholder's
right to attend the Annual Meeting and vote in person. Any PennCorp stockholder
who executes and returns a proxy may revoke such proxy at any time before it is
voted by (i) filing with the Corporate Secretary of PennCorp, at or before the
Annual Meeting, a written notice of revocation bearing a later date than the
proxy, (ii) duly executing a subsequent proxy relating to the same shares and
delivering it to the Corporate Secretary of PennCorp at or before the Annual
Meeting or (iii) attending the Annual Meeting and voting in person by ballot.
Attendance at the Annual Meeting will not, in and of itself, constitute
revocation of a proxy.
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<PAGE> 7
As of the date of this Proxy Statement, the PennCorp Board does not know of
any other matters to be presented for action by PennCorp stockholders at the
Annual Meeting. If, however, any other matters not now known are properly
brought before the Annual Meeting, the attorneys-in-fact named in the
accompanying proxy will vote upon such matters according to their discretion and
best judgment.
SOLICITATION OF PROXIES
In addition to solicitations by mail, solicitations may also be made by
personal interview, facsimile transmission, telegram and telephone. PennCorp has
retained Georgeson & Company Inc., a proxy solicitation firm, for assistance in
connection with the Annual Meeting at an estimated expense of approximately
$10,000 plus reasonable out-of-pocket expenses. Arrangements will be made with
brokerage houses and other custodians, nominees and fiduciaries to send proxies
and proxy material to their principals, and PennCorp will reimburse them for
their customary expenses in so doing.
DISSENTERS' APPRAISAL RIGHTS
Under Delaware law, PennCorp stockholders will not be entitled to any
appraisal rights in connection with any of the matters being submitted for
approval at the Annual Meeting.
5
<PAGE> 8
CERTAIN TRANSACTIONS
THE PENNCORP/KNIGHTSBRIDGE RELATIONSHIP
General
In 1995, with the authorization of the PennCorp Board, David J. Stone and
Steven W. Fickes, the Company's two most senior officers, organized the
Knightsbridge Fund to raise capital, to be managed by them, to make equity and
equity-linked investments in companies engaged primarily in the life insurance
industry. The Knightsbridge Fund, whose limited partners include affiliates of
10 leading domestic and international banking organizations, has received
subscriptions for approximately $92,000,000 in limited partnership interests,
including a $15,000,000 subscription from the Company. Messrs. Stone and Fickes
are members of Knightsbridge Capital, L.L.C. ("Knightsbridge Capital") the
general partner of the Knightsbridge Fund. Allan D. Greenberg, a member of the
PennCorp Board, owns a 5% interest in Knightsbridge Capital. Messrs. Stone and
Fickes have agreed to purchase Mr. Greenberg's interest in Knightsbridge Capital
in connection with the restructuring of the relationship between the Company and
the Knightsbridge Fund. Pursuant to the Knightsbridge Fund's limited partnership
agreement, the general partner of the Knightsbridge Fund is entitled to receive
20% of all profits earned by the limited partners after they have been repaid
their capital contributions to the partnership, assuming a specified "hurdle"
rate of return has been achieved on their capital. The general partner of the
Knightsbridge Fund cannot be removed by the limited partners, unless a court has
finally determined that the general partner has committed a willful and material
breach of the limited partnership agreement. However, the agreement provides
that if either Mr. Stone or Mr. Fickes, or both, ceases to be a member of
Knightsbridge Capital or otherwise actively involved in the management and
operations of the Knightsbridge Fund, the Knightsbridge Fund may not
subsequently call additional capital from the limited partners. The limited
partners of the Knightsbridge Fund have consented to PennCorp's proposed
acquisition of the controlling interests in Knightsbridge Capital, as described
below under "-- The Knightsbridge Restructuring Plan and Related Litigation
Settlement."
During the second half of 1995, the PennCorp Board and Messrs. Stone and
Fickes, on behalf of the Knightsbridge Fund, discussed the formation of a joint
venture to pursue life insurance acquisitions and investments. The PennCorp
Board and Messrs. Stone and Fickes concluded that the formation of a joint
venture to combine the Company's and the Knightsbridge Fund's resources on a
transaction-by-transaction basis could increase the opportunities of each to
invest in a broader range of transactions. As part of that joint venture
arrangement, the Company received a right of first refusal on all insurance
transactions considered by the Knightsbridge Fund. In September 1995, the
PennCorp Board appointed a special committee of directors composed of Thomas A.
Player, Kenneth Roman, David C. Smith, Maurice W. Slayton and Bruce W. Schnitzer
(the "Knightsbridge Committee"), one of the responsibilities of which was to
evaluate all transactions submitted to the Company by the Knightsbridge Fund and
to determine whether a particular transaction would be pursued solely by the
Company (a "PennCorp Transaction"), pursued jointly with the Knightsbridge Fund
(a "Shared Transaction"), or not pursued by the Company, in which case the
Knightsbridge Fund would be permitted to pursue the transaction for its own
account (a "Knightsbridge Transaction").
The Knightsbridge Fund and the Company determined to use Knightsbridge
Management L.L.C. ("Knightsbridge Management"), the manager of the Knightsbridge
Fund, as their joint venture vehicle. The role of Knightsbridge Management was
to provide merchant banking services on all insurance acquisitions involving the
companies acquired or invested in by the Knightsbridge Fund or the Company. Each
limited partner of the Knightsbridge Fund, including PennCorp, is obligated to
pay to Knightsbridge Management an annual management fee equal to 1.5% of its
capital commitment until the earlier of the fifth anniversary of the first
closing of the partnership or the date on which the partnership is fully
invested, and thereafter will be obligated to pay an annual management fee equal
to 1.0% of its capital commitment during a disposition period not to exceed five
years. The amount of the annual management fee is subject to offset under
certain circumstances. Knightsbridge Management may also receive transaction
fees from portfolio companies upon the completion of transactions supervised by
it. The amount of any transaction fee paid with respect to a PennCorp
Transaction or a Shared Transaction is subject to the prior review and approval
of the Knights-
6
<PAGE> 9
bridge Committee. In exchange for a 45.0% interest in Knightsbridge Management's
annual net distributable income (i.e., 45% of Knightsbridge Management's net
income after the first $1,000,000 of net income), PennCorp agreed to make
available to Knightsbridge Management certain personnel of PennCorp who
traditionally have played significant roles in the acquisition and investment
activities of PennCorp by paying the compensation and related overhead costs of
such PennCorp personnel made available to Knightsbridge Management, which
initially was expected to be $2,600,000 per year. In addition, the parties
agreed that "dead deal" costs would be borne by the Company in a PennCorp
Transaction, by Knightsbridge in a Knightsbridge Transaction, and by
Knightsbridge and the Company, proportionately, in a Shared Transaction.
Notwithstanding the foregoing, PennCorp's annual funding obligation to
Knightsbridge Management is subject to an offset equal to 50.0% of all fees paid
to Knightsbridge Management upon the completion of transactions supervised by it
during the prior fiscal year to the extent those transaction fees are allocable
to a PennCorp Transaction or to PennCorp's interest in a Shared Transaction. In
addition, as part of the negotiations related to PennCorp's participation in
Knightsbridge Management's net distributable income, PennCorp agreed to
guarantee a bank line of credit of up to $10,000,000 in the aggregate to permit
Messrs. Stone and Fickes to make their side-by-side investments required as
members of the general partner of the Knightsbridge Fund. As of November 24,
1997, Messrs. Stone and Fickes have drawn $7,150,000 in the aggregate on the
bank line of credit.
TRANSACTIONS INVOLVING THE KNIGHTSBRIDGE FUND AND PENNCORP
The SW Financial Investment
Background. On December 14, 1995, pursuant to a Shared Transaction approved
by the PennCorp Board, SW Financial, a newly organized corporation formed by the
Company, the Knightsbridge Fund and Messrs. Stone and Fickes, purchased (the "SW
Financial Investment") Southwestern Life Insurance Company ("Southwestern Life")
and Union Bankers Insurance Company ("Union Bankers") and certain related assets
from I.C.H. Corporation and certain of its subsidiaries (collectively, "ICH")
for $260,000,000. Southwestern Life and Union Bankers market and underwrite life
insurance, annuities and accident and sickness insurance products (including
Medicare supplements, long-term care, major medical and hospital indemnity
products) on primarily an individual basis. Southwestern Life's and Union
Bankers' products are sold throughout the United States and are targeted
primarily to middle income individuals. Following the acquisition of
Southwestern Life and Union Bankers by SW Financial, A.M. Best Company, an
independent insurance rating agency, upgraded the ratings of Southwestern Life
and Union Bankers to "B++(Very Good)".
ICH filed for bankruptcy in October 1995 as a result of a liquidity crisis
at the holding company. To alleviate regulatory and insurance rating agency
concerns that the ICH bankruptcy might adversely affect policyholder perceptions
of Southwestern Life and Union Bankers, which were not parties to the bankruptcy
case, ICH determined to sell those companies in a bankruptcy court-supervised
auction. For those reasons, and to satisfy tax planning objectives of ICH, the
successful bidder was required to structure its proposal so that the acquisition
of Southwestern Life and Union Bankers could be accomplished on or before
December 31, 1995 and in a manner that permitted ICH to recognize certain tax
benefits.
The PennCorp Board, including its independent directors, authorized
PennCorp and the Knightsbridge Fund to pursue the acquisition of Southwestern
Life and Union Bankers as a Shared Transaction after considering, among other
things, ICH's and its creditors' insistence that they would only consider
potential bids for Southwestern Life and Union Bankers that were structured to
allow ICH to satisfy its tax planning objectives. In addition, the PennCorp
Board expressed reluctance to increase significantly PennCorp's financial
leverage, which the directors believed might cause concern among insurance
regulatory authorities and which might also jeopardize PennCorp's ratings from
A.M. Best Company and other rating agencies. After taking into account the
foregoing factors and considering the time that might be necessary to raise
sufficient equity capital to fund the transaction based on PennCorp's target
debt to capitalization ratio, the PennCorp Board authorized management to work
with the Knightsbridge Fund to devise a transaction structure that accommodated
ICH's tax objectives and timing requirements and mitigated the above stated
concerns of the PennCorp Board. In addition, the PennCorp Board considered the
fact that there were at least
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four potential avenues for PennCorp's stockholders to realize value (directly or
indirectly) from PennCorp's potential investment in SW Financial: (i) an initial
public offering of SW Financial, (ii) a spin-off of PennCorp's investment in SW
Financial, (iii) a sale of SW Financial to a third party and (iv) the purchase
of the SW Financial Controlling Interest and the consolidation of SW Financial
into PennCorp. Based on the foregoing, the PennCorp Board elected to structure
PennCorp's investment in SW Financial in a manner that it believed enabled
PennCorp to share in the economic benefits of having purchased SW Financial for
a purchase price it considered attractive, while enabling the PennCorp Board to
be flexible with respect to PennCorp's ultimate ability to realize value from
its investment.
In November 1995, SW Financial submitted its bid to acquire Southwestern
Financial and Union Bankers. The Bankruptcy Court approved that bid on December
5, 1995.
Securities Purchased. SW Financial paid ICH $260,000,000 to acquire
Southwestern Life and Union Bankers. PennCorp and its subsidiaries invested an
aggregate of $120,000,000 in cash to purchase voting common stock, nonvoting
common stock, common stock warrants and preferred stock of SW Financial and
preferred stock of one of SW Financial's subsidiaries. SW Financial used the
proceeds from PennCorp's investment, together with a $23,000,000 investment by
the Knightsbridge Fund and a $7,000,000 investment by Messrs. Stone and Fickes
through certain of the Knightsbridge entities, $120,000,000 in borrowings under
a $125,000,000 credit facility arranged by SW Financial, and the issuance to ICH
of $40,000,000 principal amount of SW Financial's convertible debentures, to
fund the purchase price for Southwestern Life and Union Bankers. The balance of
the proceeds raised by SW Financial were used to make a $30,000,000 capital
contribution to Southwestern Life and Union Bankers, to pay transaction fees and
expenses of $10,000,000, to fund an $8,000,000 interest reserve for the SW
Financial convertible debentures and to provide $2,000,000 of working capital.
Immediately after the consummation of the SW Financial Investment, and
without giving effect to the conversion of the SW Financial convertible
debentures, PennCorp beneficially owned 75.4%, and the Knightsbridge Fund and
Messrs. Stone and Fickes, collectively, beneficially owned 33.5%, of SW
Financial's common stock. PennCorp's nonvoting common stock investment in SW
Financial is convertible, subject to certain governmental approvals, into voting
common stock upon an initial public offering or a change of control of SW
Financial. In addition, the nonvoting common stock is entitled to class voting
rights in connection with a merger of SW Financial or a sale of all or
substantially all of SW Financial's assets. The following table illustrates the
beneficial ownership of SW Financial's common stock immediately after the
consummation of the SW Financial Investment:
<TABLE>
<CAPTION>
% OF TOTAL
COMMON
VOTING NONVOTING STOCK AFTER
COMMON STOCK COMMON STOCK % OF TOTAL CONVERSION OF
----------------- ----------------- COMMON CONVERTIBLE
SHARES % SHARES % STOCK DEBENTURES
--------- ---- --------- ----- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
PennCorp Southwest, Inc.(1).......... 797,500(2) 21.0 8,400,000 100.0 75.4 59.7
Knightsbridge Fund/Stone and
Fickes............................. 4,487,500(3) 90.0 -- -- 33.5 27.1
</TABLE>
- ---------------
(1) PennCorp Southwest, Inc. is a wholly owned subsidiary of PennCorp formed to
hold PennCorp's investment in SW Financial.
(2) Includes warrants to purchase up to 297,500 shares of voting common stock at
an exercise price of $10.00 per share.
(3) Includes warrants to purchase up to 1,487,500 shares of voting common stock
at an exercise price of $10.00 per share, of which warrants to purchase a
total of 335,564 shares are held by Messrs. Stone and Fickes.
In addition to its $89,000,000 common stock investment in SW Financial,
PennCorp also purchased $21,000,000 initial liquidation value of SW Financial's
Series A Preferred Stock, which accrues (but does not require the payment of)
dividends at the rate of 10.0% per annum, compounded quarterly, and is
mandatorily redeemable on December 31, 2005. The Series A Preferred Stock is not
redeemable at the option of
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<PAGE> 11
SW Financial prior to December 31, 2005. At maturity, the Series A Preferred
Stock will be required to be redeemed for approximately $56,000,000 in cash. If
SW Financial fails to satisfy its mandatory redemption obligation, the holders
of the Series A Preferred Stock will be entitled to elect 49.0% of the members
of the Board of Directors of SW Financial and, upon receipt of regulatory
approval, a majority of the directors of SW Financial. The Series A Preferred
Stock is senior preferred stock. The holders of the Series A Preferred Stock are
entitled to class voting rights under certain circumstances, including in
connection with a merger of SW Financial or a sale of all or substantially all
its assets or the authorization or issuance of senior or pari passu preferred
stock, and as otherwise provided by law.
In addition, certain of PennCorp insurance subsidiaries purchased
$10,000,000 liquidation value of 5.5% Mandatorily Redeemable Preferred Stock,
par value $0.01 per share (the "5.5% Preferred Stock") of Southwestern Life
Companies ("SWLC"), the immediate parent company of Southwestern Life and Union
Bankers. The 5.5% Preferred Stock accrues dividends at a fixed rate of $5.50 per
share per annum, payable in cash or, subject to certain conditions, through the
issuance of additional shares of 5.5% Preferred Stock. The 5.5% Preferred Stock
is not subject to optional redemption and matures on December 31, 2005. If SWLC
fails to satisfy its mandatory redemption obligation or if dividends payable on
the 5.5% Preferred Stock are in arrears for four or more quarterly dividend
periods, the holders of the 5.5% Preferred Stock will be entitled to elect 49.0%
of the members of the Board of Directors of SWLC and, upon receipt of regulatory
approval, a majority of the Board of Directors of SWLC. The 5.5% Preferred Stock
is the only preferred stock of SWLC authorized for issuance. The holders of the
5.5% Preferred Stock are entitled to class voting rights under certain
circumstances, including in connection with a merger of SWLC or a sale of all or
substantially all its assets or the authorization or issuance of senior or pari
passu preferred stock, and as otherwise provided by law.
As part of the SW Financial Investment, PennCorp, the Knightsbridge Fund
and its affiliates, and SW Financial entered into a 10-year stockholders
agreement (the "Stockholders Agreement"). Pursuant to that agreement, prior to
the time when PennCorp converts its shares of nonvoting stock into voting common
stock (the "Conversion"), the parties have agreed that the Board of Directors of
SW Financial will consist of (i) Glenn H. Gettier (the President of Southwestern
Life and Union Bankers), so long as he is an employee of SW Financial and its
subsidiaries and is willing to serve as a director, (ii) David J. Stone and
Steven W. Fickes, so long as they are principals of the Knightsbridge Fund and
are willing to serve as directors and (iii) at least four independent directors
(as defined) reasonably acceptable to PennCorp and the Knightsbridge Fund. To
date, in light of the pending acquisition of the SW Financial Controlling
Interest, neither PennCorp nor the Knightsbridge Fund has required SW Financial
to nominate candidates to serve as independent directors. In addition to the
foregoing, prior to the Conversion, PennCorp is entitled to send three of its
designees (in addition to Messrs. Stone and Fickes) to observe all meetings of
the Board of Directors and committees thereof of SW Financial and its
subsidiaries. Mr. Gettier has resigned as an employee and officer of SW
Financial effective January 2, 1998.
The Stockholders Agreement further grants PennCorp, but not the
Knightsbridge Fund and its affiliates, certain "drag-along" rights pursuant to
which, if PennCorp desires to sell all or any portion of its common stock
(including common stock purchase warrants) in SW Financial, it can require the
Knightsbridge parties to sell an equivalent proportionate amount of their SW
Financial common stock and warrants. The Stockholders Agreement also grants both
PennCorp and the Knightsbridge parties certain "tag-along" rights pursuant to
which, subject to certain de minimis exceptions, if either party desires to sell
its common stock (including warrants) to a third party, the other party will
have the opportunity to participate on identical terms and on a ratable basis in
such sale.
In addition to the foregoing, the Stockholders Agreement grants "demand"
and "piggyback" registration rights to PennCorp and the Knightsbridge parties
under certain circumstances.
The voting provisions of the Stockholders Agreement and the tag-along and
drag-along rights thereunder automatically terminate upon the consummation of an
initial public offering of common stock of SW Financial pursuant to which SW
Financial receives gross proceeds of at least $50,000,000 in cash.
On August 5, 1997, in anticipation of the acquisition of the SW Financial
Controlling Interest, the Company purchased the SW Financial convertible
debentures from the liquidating trust established for the
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<PAGE> 12
benefit of former creditors of ICH. The Company acquired the SW Financial
convertible debentures, at par, for $40,000,000, plus accrued and unpaid
interest to the date of purchase. Concurrently with that purchase, the Company,
SW Financial and the reorganized ICH agreed to a comprehensive settlement of all
indemnification claims arising out of the SW Financial transaction. That
settlement resulted in a net payment of approximately $2,832,000 by SW Financial
to ICH and the release of previously escrowed funds being held pending the end
of the indemnity period. In addition, SW Financial also purchased certain
securities held by the ICH liquidating trust for a total payment of
approximately $1,557,000.
For further information, see Notes 6 and 18 to the Consolidated Financial
Statements of PennCorp for the Year Ended December 31, 1996 contained in the
Company's Form 8-K dated November 14, 1997.
Stockholder Litigation. On January 11, 1996, a stockholder derivative lawsuit
styled Tozour Energy Systems Retirement Plan v. David J. Stone et al. and
PennCorp Financial Group, Inc., C.A. No. 14775, was filed against the Company
and each of its directors, individually, in the Court of Chancery for the State
of Delaware. On January 25, 1996, a second shareholder derivative suit, styled
Lois Miller v. David J. Stone et al. and PennCorp Financial Group, Inc., C.A.
No. 14795, was filed against the Company and each of its directors,
individually, in the Delaware Chancery Court. The complaint in that suit has not
yet been served on the Company or the other defendants. The suits allege that
the SW Financial Investment involved the usurpation of a corporate opportunity
and a waste of the Company's assets by Messrs. Stone and Fickes, and that the
directors of the Company in approving that transaction, failed to act in good
faith and breached their fiduciary duties, including the duty of loyalty to the
Company and its stockholders, having favored the interests of Messrs. Stone and
Fickes over the Company and its stockholders. The Tozour and Miller lawsuits
seek judgments against each of the defendants for the amount of damages
sustained or to be sustained by the Company as a result of the breaches of
fiduciary duty alleged in the complaints, the imposition of a constructive trust
for the benefit of the Company on profits or benefits obtained by any defendant
through the alleged breaches of fiduciary duty, attorneys' fees and costs, and
such other relief as the court determines to be just, proper or equitable. The
parties to the lawsuits have agreed to enter into an Amended Stipulation and
Agreement of Compromise and Settlement (the "Amended Proposed Settlement"),
which will contain the terms and conditions described below.
The Acordia Transaction
On September 1, 1997, a group of equity investors including the
Knightsbridge Fund and Wand Partners L.L.C. (which is controlled by Bruce W.
Schnitzer, a director of the Company), acquired the insurance brokerage
operations of Acordia, Inc., a subsidiary of Anthem Insurance Companies.
Acordia, Inc. is an insurance broker specializing in the marketing of commercial
property and casualty insurance programs and other types of insurance products.
In connection with the Acordia transaction, certain of the Company's
insurance subsidiaries purchased $25,000,000 principal amount of senior
subordinated notes of ACO Acquisition Corp., the entity formed to acquire the
Acordia insurance brokerage operations, and the Company purchased $20,000,000
liquidation preference of preferred stock of ACO Brokerage Holdings Corporation,
the parent of ACO Acquisition Corp. The ACO Acquisition Corp. senior
subordinated notes bear interest at the rate of 12.5% per annum, payable
semiannually in cash. The terms of the senior subordinated notes were negotiated
between representatives of the equity sponsor group and an unaffiliated
financial institution in an arms length transaction. The ACO Brokerage Holdings
Corporation preferred stock bears dividends at the rate of 17.0% per annum,
which may be paid in cash or, at the election of the issuer, in additional
shares of preferred stock. The terms of the ACO Brokerage Holdings Corporation
preferred stock were negotiated between the Company and representatives of the
equity sponsor group and bear terms that the Company believes are consistent
with those that a third party investor would require for such an investment. The
Company received approximately $1,100,000 in fees from ACO Brokerage Holdings
Corporation and ACO Acquisition Corp. for its commitment to purchase the
subordinated notes and preferred stock of the Acordia companies.
The Knightsbridge Fund invested $20,000,000 in the common stock of ACO
Brokerage Holdings Corporation and beneficially owned at the completion of the
Acordia transaction 27.3% of its total common
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<PAGE> 13
stock outstanding. Pursuant to the Knightsbridge Fund's limited partnership
agreement, Messrs. Stone and Fickes, through Knightsbridge Capital, contributed
$200,000 to the Knightsbridge Fund's $20,000,000 investment in ACO Brokerage
Holdings Corporation. In addition, Messrs. Stone and Fickes, collectively,
invested $5,000,000 in the common stock of ACO Brokerage Holdings Corporation in
satisfaction of the general partner's co-investment obligation under the
Knightsbridge Fund limited partnership agreement. Knightsbridge Management
received transaction and commitment fees aggregating approximately $1,700,000
from ACO Brokerage Holdings Corporation and ACO Acquisition Corp. in connection
with the consummation of the Acordia transaction. Messrs. Stone and Fickes
received aggregate commitment fees of $228,571 from ACO Brokerage Holdings
Corporation in connection with their co-investment in the Acordia transaction.
In light of the proposed Knightsbridge restructuring, the Company and
Messrs. Stone and Fickes have agreed to enter into a contingent repurchase
arrangement pursuant to which, if the stockholders of the Company approve the
purchase of The Fickes and Stone Knightsbridge Interests, the Company will be
obligated to buy, and Messrs Stone and Fickes will be obligated to sell, the
$5,000,000 common stock co-investment in ACO Brokerage Holdings Corporation, and
the Company will be obligated to reimburse Messrs. Stone and Fickes for their
$200,000 capital contribution to the Knightsbridge Fund. The Company will
reimburse Messrs. Stone and Fickes their $5,200,000 investment at their cost,
together with interest thereon at the IRS's mid-term rate (at the date of
acquisition) from September 1, 1997 through the date of payment. Messrs. Stone
and Fickes will pay to the Company the commitment fee they received in the
Acordia transaction, plus interest thereon, upon the consummation of the
purchase of The Fickes and Stone Knightsbridge Interests. Although a formal
agreement has not been executed as of the date hereof, the purpose of the
contingent repurchase arrangement is to place the Company in the position it
would have occupied if the Company's shareholders had approved the acquisition
of The Fickes and Stone Knightsbridge Interests before the consummation of the
Acordia transaction.
To fund their co-investment in the Acordia transaction, Messrs. Stone and
Fickes borrowed an aggregate of $5,200,000 under a bank line of credit
guaranteed by the Company. In the event that the Company's stockholders do not
approve the purchase of The Fickes and Stone Knightsbridge Interests, each of
Messrs. Stone and Fickes has pledged 250,000 shares of common stock of SW
Financial, their ownership interest in the common stock of ACO Brokerage
Holdings Corporation and their 27.5% interests in the net distributable income
of Knightsbridge Management to secure the Company's guarantee of all loans drawn
under the line of credit.
PAYMENTS INVOLVING KNIGHTSBRIDGE MANAGEMENT
In 1995, PennCorp paid Knightsbridge Management its pro rata portion (based
on its 16.3% limited partnership interest in the Knightsbridge Fund) of the
annual management fee due under the Knightsbridge Fund limited partnership
agreement. PennCorp also paid substantially all its $2,600,000 service fee to
Knightsbridge Management, pro rated from June 5, 1995. Moreover, after the
completion of the SW Financial Investment described below under the caption
"-- The SW Financial Investment", and in recognition of that transaction and
other contributions to PennCorp, the PennCorp Board approved, upon
recommendation of the Compensation Committee of the PennCorp Board, the payment
of incentive bonuses to Messrs. Stone and Fickes and the other personnel of
PennCorp made available to Knightsbridge Management aggregating approximately
$2,565,000.
In December 1995, Knightsbridge Management received a fee of $3,900,000
from SW Financial upon completion of the acquisition of Southwestern Life and
Union Bankers. Based on their respective fully diluted equity investments in SW
Financial (calculated without regard to SW Financial's convertible debentures,
which were issued to a third party), the Company's funding obligation to
Knightsbridge Management for 1996 was reduced by $1,300,000 (50.0% of the
Company's share of the $3,900,000 fee obligation based on its two-thirds
interest in the SW Financial Investment) and the limited partners' 1996
management fee to Knightsbridge Management was reduced, in the aggregate, by
$650,000 (50.0% of the Knightsbridge Fund's share of the $3,900,000 fee
obligation based on its one-third interest in the SW Financial Investment). In
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<PAGE> 14
addition, the Company recorded $530,000 of income in 1995 related to its 45.0%
interest in Knightsbridge Management's 1995 net distributable income.
In January 1996, the Knightsbridge Fund entered into an agreement to
purchase United Life & Annuity Insurance Company ("UC Life") from United
Companies Financial Corporation. As part of the Knightsbridge restructuring
transactions which are described herein, the Company purchased the right to
consummate the UC Life acquisition from the Knightsbridge Fund's limited
partners for approximately $7,575,000 in cash (or approximately $6,375,000 after
giving effect to the Company's portion of that payment), which was the only
right of the Knightsbridge Fund with respect to UC Life. Neither Mr. Stone nor
Mr. Fickes nor their respective affiliates received, nor will they receive after
giving effect to the consummation of the acquisition of The Fickes and Stone
Knightsbridge Interests by the Company, any portion of that payment. The Company
completed the UC Life acquisition on July 24, 1996. Knightsbridge Management
accrued a fee of $2,548,000 from the Company in connection with the consummation
of that transaction.
For the years ended December 31, 1996 and 1995, the Company paid or accrued
approximately $2,548,000 and approximately $2,600,000 in transaction fees to
Knightsbridge Management related to the UC Life and SW Financial transactions,
respectively. During 1996, certain of the Company's affiliates and subsidiaries
paid management fees to Knightsbridge Management amounting to approximately
$2,190,000, which have been contingently expensed pending the shareholder vote
on the acquisition of The Fickes and Stone Knightsbridge Interests. SW Financial
and UC Life incurred Knightsbridge Management investment advisory fees totaling
approximately $2,426,000 and $0 during 1996 and 1995, respectively. In addition,
the Company received a $1,000,000 stand-by commitment fee from SW Financial in
1996 for contingent financing on a real estate transaction. SW Financial did not
draw upon the commitment.
THE KNIGHTSBRIDGE RESTRUCTURING PLAN AND RELATED LITIGATION SETTLEMENT
In February 1996, Messrs. Stone and Fickes began discussions with the
PennCorp Board on a means of consolidating their outside business interests,
including the Knightsbridge Fund, under PennCorp. Subsequently, Messrs. Stone
and Fickes and the members of the Knightsbridge and Compensation Committees of
the Board of Directors developed a plan to enable PennCorp to manage the
Knightsbridge Fund and to provide Messrs. Stone and Fickes with a compensation
program that offers them compensation opportunities with economic interests
aligned with stockholders generally and that provides incentives for each to
make a long-term, full-time commitment to PennCorp.
The components of the Knightsbridge restructuring plan are as follows:
- The adoption of compensation arrangements pursuant to which Messrs. Stone
and Fickes have entered into five-year employment agreements with
PennCorp. These compensation arrangements are described in detail under
the caption "EXECUTIVE COMPENSATION -- Employment Agreements." THE
CONTINUATION OF THOSE EMPLOYMENT AGREEMENTS, INCLUDING THE STOCK OPTIONS
GRANTED THEREUNDER, IS CONTINGENT UPON THE CONSUMMATION OF THE PURCHASE
BY PENNCORP OF THE FICKES AND STONE KNIGHTSBRIDGE INTERESTS.
- The acquisition by PennCorp of the interests of Messrs. Stone and Fickes
in the Knightsbridge Fund, Knightsbridge Management, Knightsbridge
Capital, the general partner of the Knightsbridge Fund, and Knightsbridge
Consultants L.L.C. ("Knightsbridge Consultants"), the asset management
subsidiary of Knightsbridge Management (collectively, "The Fickes and
Stone Knightsbridge Interests"), as described below under the caption
"-- Acquisition of The Fickes and Stone Knightsbridge Interests."
- The acquisition by PennCorp from the Knightsbridge Fund and Messrs. Stone
and Fickes of their respective holdings of common stock and common stock
warrants of SW Financial; provided that if the Amended Proposed
Settlement is approved by the Chancery Court after notice to PennCorp
stockholders, Messrs. Stone and Fickes will cancel their SW Financial
common stock warrants for no additional consideration. See
"-- Acquisition of the SW Financial Controlling Interest" and
"-- Proposed Settlement of Shareholder Litigation."
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<PAGE> 15
The acquisition of The Fickes and Stone Knightsbridge Interests is being
submitted to a vote of the stockholders of PennCorp pursuant to Proposal No. 5
set forth herein. The acquisition of the SW Financial Controlling Interest is
being submitted to a vote of the stockholders of PennCorp pursuant to Proposal
No. 6 set forth herein.
Acquisition of The Fickes and Stone Knightsbridge Interests. Commencing in
February 1996 and continuing through September 1996, the Knightsbridge Committee
met eleven times (five of which were joint meetings with the Compensation
Committee of the Board) to discuss possible restructuring of the PennCorp/
Knightsbridge relationship, resulting in among other things an agreement for the
Company to purchase The Fickes and Stone Knightsbridge Interests and to procure
a fairness opinion from Smith Barney related to the transaction. During this
same time frame, the PennCorp Board met on five occasions. The members of the
Knightsbridge Committee are Thomas A. Player, Bruce W. Schnitzer, Maurice W.
Slayton, Kenneth Roman and David C. Smith. Each of the members of the
Knightsbridge Committee attended all eleven meetings, except Mr. Roman who
attended eight of the meetings, Mr. Smith who attended ten of the meetings and
Mr. Schnitzer who attended ten of the meetings. All Board members attended the
five Board meetings, except for Mr. Greenberg who attended four of the meetings,
Mr. Schnitzer who attended four of the meetings and Mr. McCormick who attended
three of the meetings. Representatives of Smith Barney and Weil, Gotshal &
Manges LLP, legal counsel to the Company, attended some of the meetings. The
material items discussed at these meetings were as follows: For the meetings
through May 23, 1996, the PennCorp Board discussed and developed the
Knightsbridge restructuring plan, the components of which are described above.
In addition to determining the price to be paid for The Fickes and Stone
Knightsbridge Interests, the directors also determined that the payment of the
consideration for The Fickes and Stone Knightsbridge Interests would be subject
to reduction for damages awarded to the Company in the event of breaches by
Messrs. Fickes or Stone of the non-competition covenants contained in their
employment contracts, and determined that the payment of the consideration would
be accelerated in the event of a change of control (as defined). For the
meetings from June 1996 through September 1996, the PennCorp Board determined to
engage Smith Barney to render its fairness opinion on the amount and form of
consideration to be paid for The Fickes and Stone Knightsbridge Interests, and
determined that the assumptions and factors to be used by Smith Barney, which
are described below, were appropriate. The PennCorp Board also requested that
Smith Barney bring down its fairness opinion to the date of the proxy
solicitation.
The negotiations on the price to be paid for The Fickes and Stone
Knightsbridge Interests involved a discussion between Messrs. Stone and Fickes
and the PennCorp Board as to whether the price should reflect the performance of
investments then held by the Knightsbridge Fund and should take into account the
potential performance of future investments that might be made by the
Knightsbridge Fund. Although Messrs. Fickes and Stone felt that there was
potentially substantial value stemming from the performance of future
investments that might be made by the Knightsbridge Fund and which should be
reflected in the price, it was agreed not to use such potential value in
calculating the purchase price. The PennCorp Board agreed to pay Messrs. Stone
and Fickes $10,000,000 in the form of PennCorp Common Stock for The Fickes and
Stone Knightsbridge Interests based on the PennCorp Board's preliminary
conclusion (subject to confirmation by Smith Barney) that $10,000,000
approximated the present value of the future fee income to be expected from the
ownership of the Knightsbridge entities (excluding any assumptions about the
performance of investments then held by the Knightsbridge Fund or about the
performance of future investments that might be made by the Knightsbridge Fund).
In June 1996, Smith Barney advised the PennCorp Board, on a preliminary basis
and subject to further investigation, that it appeared that the $10,000,000
purchase price was fair from a financial point of view. The PennCorp Board and
Messrs. Stone and Fickes agreed that, consistent with their objectives of
ensuring that the interests of Messrs. Stone and Fickes are fully aligned with
PennCorp stockholders, that the consideration for the acquisition of The Fickes
and Stone Knightsbridge Interests should be in the form of PennCorp Common Stock
and that the transfer of the shares to Messrs. Stone and Fickes should be
generally deferred until April 15, 2001. Based on the closing price of the
PennCorp Common Stock on the NYSE on April 15, 1996, the date of the initial
agreement between the PennCorp Board and Messrs. Stone and Fickes on the terms
of the acquisition of The Fickes and Stone Knightsbridge Interests, the parties
agreed that Messrs. Stone and Fickes would receive 346,320 shares of PennCorp
Common Stock (or 173,160 shares each) for their interests in the Knightsbridge
entities. Since the delivery of the PennCorp
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<PAGE> 16
Common Stock is deferred for five years, the PennCorp Board agreed during this
period to make cash payments to Messrs. Stone and Fickes approximating the
interest that PennCorp would pay if a $10,000,000 promissory note had been
issued to Messrs. Stone and Fickes. Following the consummation of the
Knightsbridge restructuring, Messrs. Stone and Fickes will have no further
economic interests in investments made by the Knightsbridge Fund after April 15,
1996.
Based on the foregoing, PennCorp proposes to acquire The Fickes and Stone
Knightsbridge Interests in exchange for PennCorp's agreement to make annual cash
payments, currently estimated to be $330,000 to each of Messrs. Stone and Fickes
commencing on the date of consummation of the purchase of The Fickes and Stone
Knightsbridge Interests and on each April 15 thereafter, commencing April 15,
1998 and ending on April 15, 2001 and to deliver to each of Messrs. Stone and
Fickes on April 15, 2001, 173,160 shares of PennCorp Common Stock (subject to
adjustment for stock splits, reverse stock splits and similar transactions). The
total number of shares to be delivered has been calculated by dividing
$5,000,000 (the value agreed to by the PennCorp Board and each of Messrs. Stone
and Fickes for the sale of their respective portions of The Fickes and Stone
Knightsbridge Interests) by $28.875 per share, the closing price of the PennCorp
Common Stock on the NYSE on April 15, 1996, the date on which the Knightsbridge
Committee and Messrs. Stone and Fickes reached agreement on the general terms of
the acquisition of The Fickes and Stone Knightsbridge Interests and the
effective date of the Fickes and Stone employment agreements. The actual amount
of the annual payment will be based on a theoretical rate of interest equal to
the IRS's mid-term rate at the time of the consummation of the acquisition of
The Fickes and Stone Knightsbridge Interests on a notional amount of $5,000,000.
In addition, Messrs. Stone and Fickes (i) will retain their right to receive,
under the circumstances specified in the Knightsbridge Fund's limited
partnership agreement, their portion of the general partner's 20% share of the
profits earned by the limited partners of the Knightsbridge Fund on the fund's
$23,000,000 investment in SW Financial and on the Knightsbridge Fund's
$1,000,000 investment in Portsmouth Financial Group, Inc. ("Portsmouth"), which
owns a viatical settlement company and which was the Knightsbridge Fund's only
other investment as of April 15, 1996, the effective date of the Knightsbridge
restructuring plan, (ii) will withdraw the balance in their capital accounts in
Knightsbridge Management as of December 31, 1995 and, in addition, will receive
at the closing of the acquisition an amount in cash of approximately $135,000 in
the aggregate, which equals their share of Knightsbridge Management's net
distributable income from January 1, 1996 through April 15, 1996 and (iii) will
retain their common equity interests in Portsmouth, which were originally
purchased for approximately $2,150,000 as part of their co-investment
requirement as members of the general partner of the Knightsbridge Fund. SW
Financial has agreed, subject to required regulatory approvals, if any, and
negotiation of definitive documentation and receipt of advice with respect to
appropriate market terms, to make up to a $10,000,000 preferred equity
investment in Portsmouth. As part of the Amended Proposed Settlement, Messrs.
Stone and Fickes have agreed that if there is a definitive agreement entered
into during the twelve months ending November 25, 1998 for the sale of
Portsmouth, they will pay over to PennCorp any consideration which they receive
upon such sale with respect to their personal investment in Portsmouth in excess
of $3,450,000 in the aggregate (115% of $3,000,000, which amount was originally
intended to be paid by Portsmouth to repurchase the investment in Portsmouth of
Messrs. Stone and Fickes).
By acquiring The Fickes and Stone Knightsbridge Interests, PennCorp will
receive the entire annual management fee paid by the limited partners of the
Knightsbridge Fund (presently approximately $1,400,000 per year, subject to
certain offsets), transactional fees on investments made by the Knightsbridge
Fund and all the fees for oversight and investment management services provided
to businesses in which the Knightsbridge Fund invests. In addition, PennCorp
will acquire control of the general partner of the Knightsbridge Fund and,
therefore, will control all future investment decisions by that fund. The
PennCorp Board believes that control of the Knightsbridge Fund will be an asset
to PennCorp because it will provide management with an additional source of
available capital and the flexibility to diversify its risk in making strategic
investments in, and/or acquisitions of, life insurance and related companies
that do not necessarily complement the core strengths of PennCorp. As the
general partner of the Knightsbridge Fund, PennCorp will co-invest, in addition
to its 16.3% limited partnership investment, $5,000,000 per transaction.
Accordingly, as the general partner of the Knightsbridge Fund, so long as the
limited partners achieve at least a 15% cumulative rate of return on their
invested capital in all future transactions (an increase from the 10% "hurdle"
rate currently in effect for
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the Knightsbridge Fund), PennCorp will be entitled to 20% of all profits earned
by the limited partners, in addition to any profits earned on the general
partner's 1% capital investment and PennCorp's co-investments.
THE COMPANY HAS OBTAINED ALL REQUIRED CONSENTS AND APPROVALS, OTHER THAN
STOCKHOLDER APPROVAL, NECESSARY TO CONSUMMATE THE ACQUISITION OF THE FICKES AND
STONE KNIGHTSBRIDGE INTERESTS. IF THE ACQUISITION OF THE FICKES AND STONE
KNIGHTSBRIDGE INTERESTS IS NOT CONSUMMATED, THEN THE EMPLOYMENT AGREEMENTS
ENTERED INTO BY MESSRS. STONE AND FICKES IN JUNE 1996 IN CONNECTION WITH THE
KNIGHTSBRIDGE RESTRUCTURING PLAN WILL TERMINATE AND ALL BENEFITS RECEIVED,
INCLUDING THE STOCK OPTIONS GRANTED TO MESSRS. STONE AND FICKES UNDER THE STOCK
PLAN, WILL BE RESCINDED AND MESSRS. STONE AND FICKES AND THE KNIGHTSBRIDGE
COMMITTEE WILL RECONVENE THEIR NEGOTIATIONS ON THE DEFINITIVE TERMS OF THE
KNIGHTSBRIDGE RELATIONSHIP.
Opinion of Financial Advisor -- Knightsbridge. The PennCorp Board has
engaged Smith Barney as its financial advisor and to render its opinion whether
the consideration to be paid by PennCorp for The Fickes and Stone Knightsbridge
Interests is fair, from a financial point of view, to PennCorp and its
stockholders (other than Messrs. Stone and Fickes). In the past, Smith Barney
has provided significant investment banking and financial advisory services to
PennCorp and its affiliates, for which it has received customary compensation.
In addition, Smith Barney acted as a financial advisor to SW Financial in its
acquisition of Southwestern Life and Union Bankers in December 1995. PennCorp
anticipates that Smith Barney will continue to provide investment banking and
financial advisory services to it in the future. Smith Barney received a fee
from PennCorp in the amount of $250,000 plus out-of-pocket expenses including
attorney's fees, for providing financial advice and analyzing the fairness, from
a financial point of view, to PennCorp and its stockholders (other than Messrs.
Stone and Fickes) of the consideration to be paid for The Fickes and Stone
Knightsbridge Interests, which fee was not dependent upon Smith Barney's
conclusions regarding the fairness of that transaction.
Smith Barney was selected by the PennCorp Board as its financial advisor
based upon Smith Barney's experience, expertise and familiarity with PennCorp
and the Knightsbridge Fund, Knightsbridge Management, Knightsbridge Capital and
Knightsbridge Consultants (collectively, the "Knightsbridge Entities") and their
respective businesses. The consideration to be paid by PennCorp for The Fickes
and Stone Knightsbridge Interests was determined through negotiations between
the PennCorp Board and Messrs. Stone and Fickes.
Smith Barney is an internationally recognized investment banking firm and
is regularly engaged in the valuation of businesses and securities in connection
with mergers and acquisitions, leveraged buyouts, negotiated underwritings,
competitive biddings, secondary distributions of listed and unlisted securities,
private placements and valuations for estate, corporate and other purposes. In
the ordinary course of its business, Smith Barney and its affiliates may
actively trade the debt and/or equity securities of PennCorp for their own
account and for the accounts of customers and, accordingly, may at any one time
hold a long or short term position in such securities.
On September 19, 1996, Smith Barney delivered orally and in writing its
opinion that, as of April 15, 1996, the consideration determined to be paid by
PennCorp to acquire The Fickes and Stone Knightsbridge Interests was fair to
PennCorp and its stockholders (other than Messrs. Stone and Fickes) from a
financial point of view. Smith Barney has reaffirmed in writing its fairness
opinion as of the date of this Proxy Statement. In so doing, Smith Barney
confirmed the appropriateness of its reliance on the analyses used to render its
September 19, 1996 opinion by reviewing the assumptions upon which such analyses
were based and the factors considered in connection therewith.
THE FULL TEXT OF SMITH BARNEY'S SEPTEMBER 19, 1996 WRITTEN OPINION AND ITS
WRITTEN AFFIRMATION THEREOF, WHICH SETS FORTH THE ASSUMPTIONS MADE, THE MATTERS
CONSIDERED, THE SCOPE OF LIMITATIONS ON THE REVIEW UNDERTAKEN AND THE PROCEDURES
FOLLOWED BY SMITH BARNEY IN RENDERING SUCH OPINION ARE ATTACHED AS ANNEX A TO
THIS PROXY STATEMENT AND ARE INCORPORATED HEREIN BY REFERENCE. STOCKHOLDERS OF
PENNCORP ARE URGED TO, AND SHOULD, READ THE SMITH BARNEY OPINION CAREFULLY AND
IN ITS ENTIRETY. SMITH BARNEY'S OPINION IS ADDRESSED TO THE BOARD OF DIRECTORS
AND ADDRESSES ONLY THE FAIRNESS, FROM A FINANCIAL POINT OF VIEW, TO PENNCORP AND
ITS STOCKHOLDERS (OTHER THAN MESSRS. STONE AND FICKES) OF THE CONSIDERATION TO
BE PAID BY PENNCORP FOR THE FICKES AND STONE KNIGHTSBRIDGE INTERESTS AND DOES
NOT CONSTITUTE A RECOMMENDATION TO ANY PENNCORP STOCKHOLDER AS TO HOW SUCH
STOCKHOLDER SHOULD VOTE AT THE ANNUAL MEETING. THE SUMMARY OF THE SMITH BARNEY
OPINION SET FORTH IN THIS PROXY STATEMENT IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE FULL TEXT OF SUCH OPINION.
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In arriving at its opinion, Smith Barney, among other things, spoke with
senior executives of PennCorp to discuss the business, operations and other
prospects of the Knightsbridge Entities and examined certain business, legal and
financial information relating to such entities provided to it by PennCorp and
Messrs. Stone and Fickes. The Smith Barney opinion is necessarily based upon
economic, market and other conditions as in effect on, and the information
available to it as of, September 19, 1996, the date of the opinion.
In rendering its opinion, Smith Barney assumed and relied, without
independent verification, upon the accuracy and completeness of all financial
and other information publicly available or furnished to or otherwise discussed
with it. With respect to financial forecasts and other information provided to
or otherwise discussed with it, Smith Barney assumed that such forecasts and
other information were reasonably prepared and were based upon and reflected the
best currently available estimates and judgments of the management of PennCorp,
including Messrs. Stone and Fickes, as to the expected future financial
performance of the Knightsbridge Entities and certain other entities.
In addition, Smith Barney assumed, without independent analysis and with
the permission of the PennCorp Board, the fairness to PennCorp and its
stockholders of the transactions and events described in the Proxy Statement
under the heading "-- The PennCorp/Knightsbridge Relationship." In addition,
Smith Barney assumed, with the permission of the PennCorp Board, (i) the
retention of the right to acquire UC Life by the Knightsbridge Fund (the "UC
Life Investment") as well as the related management and other transaction fees
that would have been payable to Knightsbridge Management and Knightsbridge
Consultants as a result of such acquisition, (ii) that the employment agreements
between PennCorp and each of Messrs. Stone and Fickes described herein are on
fair and reasonable terms and (iii) the retention by Knightsbridge Management
and Knightsbridge Consultants of their pro rata portion of the management fees
and other fees associated with the Knightsbridge Fund's investment in SW
Financial.
The following is a brief summary of the analysis performed by Smith Barney
and reviewed with the PennCorp Board on September 19, 1996:
Discounted Cash Flow Analysis. Smith Barney's analysis of The Fickes and
Stone Knightsbridge Interests consisted of an analysis of the present value (as
of April 15, 1996) of future fees and income to Messrs. Stone and Fickes through
their interests in the Knightsbridge Entities. This analysis was based on the
information provided Smith Barney by PennCorp and Messrs. Stone and Fickes and
the assumption that the Knightsbridge Fund would make no new investments and
that the investments held by it as of April 15, 1996 would continue to be held
by it until December 31, 2004 (the initial termination date of the Knightsbridge
Fund).
The stream of future fees and income to Messrs. Stone and Fickes through
their interests in the Knightsbridge Entities include, among other things,
annual management fees payable to Knightsbridge Management and the general
partner profits payable to Knightsbridge Capital. See "-- The
PennCorp/Knightsbridge Relationship."
Management Fees. In calculating the annual fees payable to Knightsbridge
Management, Smith Barney assumed that there would be no growth in the assets
under management by Knightsbridge Management as of April 15, 1996. Smith Barney
calculated that the management income payable to Knightsbridge Management (other
than fees associated with the SW Financial Investment or the UC Life Investment)
would be $1,380,000 (1.5% of $92,000,000) annually for the period from April 15,
1996 to June 5, 2000 and would be $460,000 (1% of $46,000,000) annually for the
period from June 5, 2000 through December 31, 2004. In addition, Smith Barney
calculated that the fees associated with the SW Financial Investment payable to
Knightsbridge Management would be approximately $787,000 annually and the fees
associated with the UC Life Investment would be approximately $1,600,000
annually. Smith Barney calculated that the total annual fees payable to
Knightsbridge Management, after being offset by the interest in such fees held
by PennCorp, would be approximately $2,750,000 in 1996, $1,845,000 in 1997,
$2,522,000 for each of 1998 and 1999, $2,232,000 in 2000 and $2,016,000 for each
of 2001-2004.
Other Income. Smith Barney assumed that certain additional economic value
would accrue to PennCorp because it would have incurred approximately $1,725,000
in order to raise an amount of capital equal to the uninvested capital of
Knightsbridge Fund, based upon a 2% placement agent fee and 0.5% of other
expenses.
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Smith Barney did not include in its valuation an estimate of the future general
partner profits to be received by Knightsbridge Capital.
The stream of future fees and income to Messrs. Stone and Fickes through
their interests in the Knightsbridge Entities were prorated for the period
between April 15, 1996 and December 31, 1996 and were discounted at after-tax
discount rates of between 10% and 23.0%, producing a valuation for The Fickes
and Stone Knightsbridge Interests of approximately $14,499,000 to $9,997,000. In
selecting the range of after-tax discount rates used in its analysis, Smith
Barney chose discount rates that were both lower and higher than PennCorp's
target return on invested capital of 15%, with the low end of that range (10%)
approximating Smith Barney's estimate of PennCorp's weighted cost of capital.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to a partial analysis or summary description. In
arriving at its opinion, Smith Barney considered the results of all its analyses
as a whole and did not attribute any particular weight to any analysis or factor
considered by it. Smith Barney believes that selecting a portion of Smith
Barney's analysis, without considering all analyses, would create an incomplete
view of the process underlying its opinion. In addition, Smith Barney may have
deemed various assumptions more or less probable than other assumptions, so that
ranges of valuations resulting for any particular analysis described above
should not be taken to be Smith Barney's view of actual value of The Fickes and
Stone Knightsbridge Interests.
Acquisition of the SW Financial Controlling Interest. As part of the
proposed Knightsbridge restructuring, the PennCorp Board began negotiating to
purchase the SW Financial Controlling Interest from the Knightsbridge Fund and
Messrs. Stone and Fickes. The PennCorp Board made this decision after taking
into account the improvement in PennCorp's leverage ratio following its
successful $165,000,000 common stock offering in February 1996, which lessened
the PennCorp Board's concerns that insurance regulatory authorities and rating
agencies would respond unfavorably to an increase in PennCorp's leverage ratio.
Additionally, as previously announced, PennCorp is in the process of
reorganizing, consolidating and integrating its insurance operations into the
Career Division, Payroll Division, Financial Services Division and Individual
Division. The PennCorp Board considers the acquisition of the SW Financial
Controlling Interest to be an important step in enabling PennCorp to establish
its Individual Division and likely integrating it with the Financial Services
Division. The PennCorp Board created a special committee (the "Special
Committee"), consisting of Thomas A. Player, Bruce W. Schnitzer and Maurice W.
Slayton, to negotiate a purchase price for the SW Financial Controlling Interest
with Messrs. Stone and Fickes, acting on behalf of the Knightsbridge Fund. The
Special Committee engaged Smith Barney as its financial advisor to assist it in
the valuation process. Smith Barney was selected by the Special Committee based
upon Smith Barney's experience, expertise and familiarity with PennCorp and SW
Financial. The Knightsbridge Fund engaged Fox-Pitt, Kelton Inc. as its financial
advisor.
Between January 1, 1997 and January 15, 1997, the Special Committee of the
PennCorp Board had four meetings and several telephone conversations with
representatives of Smith Barney to discuss valuations of SW Financial and to
develop a purchase price to be offered to the Knightsbridge Fund and Messrs.
Stone and Fickes for the SW Financial Controlling Interest. Each member of the
Special Committee attended all four meetings except for Mr. Schnitzer who
attended three meetings. In addition, David C. Smith and Kenneth Roman attended
four and one of the Special Committee meetings, respectively. David J. Stone and
Steven W. Fickes attended portions of the Special Committee meetings.
Additionally the entire PennCorp Board met on January 15, 1997. Representatives
of Smith Barney attended all four Special Committee meetings and representatives
of Weil, Gotshal & Manges LLP attended one of the meetings. The material items
discussed at these meetings related to the assumptions used in Smith Barney's
valuations, including assumptions related to the leverage ratio for SW
Financial, the cost of refinancing SW Financial's debt, and the exercise of
Messrs. Stone's and Fickes' warrants in SW Financial. Discussions also included
selection of comparable public companies for Smith Barney's analysis and
selection of precedent transactions in the life insurance business segments,
including prior PennCorp acquisitions, that were deemed comparable to the
purchase of the SW Financial Controlling Interest. The various valuation
methodologies discussed by Smith Barney with the Special Committee are discussed
in detail below under the caption "-- Opinion of Financial Advisor -- SW
Financial Controlling Interest." The Special Committee of the PennCorp Board,
working in conjunction
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with Smith Barney, developed ranges of implied values for the SW Financial
Controlling Interest. The lowest value for all of these ranges was $34,700,000
and the highest value was $90,700,000.
On January 14, 1997 and January 15, 1997, meetings were held between
Messrs. Stone and Fickes and the Special Committee and, at times, the PennCorp
Board at which the parties negotiated the definitive purchase price for the SW
Financial Controlling Interest. Based on the advice of Smith Barney and after
negotiations with Messrs. Stone and Fickes on behalf of the Knightsbridge Fund,
the PennCorp Board authorized PennCorp to acquire the SW Financial Controlling
Interest, together with any and all existing rights to future fees or other
income which could have been derived from SW Financial or its subsidiaries, from
the Knightsbridge Fund and Messrs. Stone and Fickes for approximately
$69,537,000 in cash. However, under the terms of the January 1997 agreement, the
parties agreed that if the Original Proposed Settlement (as defined) were
approved, Messrs. Stone and Fickes would cancel their SW Financial common stock
warrants for no additional consideration, which would have enabled PennCorp to
purchase the SW Financial Controlling Interest for $67,500,000 (the "Original
Agreement").
On November 10, 1997, one of the limited partners of the Knightsbridge Fund
delivered a letter to the PennCorp Board stating that it did not believe the
terms of the Original Agreement continued to be appropriate given the unexpected
delay in the consummation of that transaction, which had been anticipated to
occur in the first quarter of 1997, and requesting an immediate reconsideration
of the terms of that transaction. The members of the Knightsbridge Committee
held a telephonic meeting on November 13, 1997 to discuss the letter from the
Knightsbridge limited partner.
At the November 13, 1997 meeting, David J. Stone, acting on behalf of the
general partner of the Knightsbridge Fund, advised the Knightsbridge Committee
that the limited partners were dissatisfied with the terms of the Original
Agreement in light of the passage of time since the execution of the Original
Agreement in January 1997. Mr. Stone advised the Knightsbridge Committee that he
believed that one or more of the limited partners were prepared to take action
to protect the appreciated value of their investment. Mr. Stone asked the
Knightsbridge Committee to reconsider the terms of the Original Agreement.
During the November 13, 1997 meeting, the Knightsbridge Committee's legal
counsel advised it of the procedural and substantive issues surrounding the
Company's ability to seek specific performance of the Original Agreement. After
considering that advice, the Knightsbridge Committee unanimously concluded that,
in light of the important historical and ongoing business relationships between
the Company and the limited partners of the Knightsbridge Fund, who are among
the Company's lenders and sources of possible acquisitions, in order to avoid a
possible dispute that could further disrupt the Company's ability to restructure
the Knightsbridge relationship and in order to consolidate the voting control
and operations of SW Financial, it would be appropriate to increase the amount
paid to the Knightsbridge Fund for the SW Financial Controlling Interest to
compensate the limited partners for, among other things, the unexpected and
substantial delay in the consummation of the purchase of the SW Financial
Controlling Interest.
On November 18, 1997, Thomas A. Player, the Chairman of the Knightsbridge
Committee, together with legal counsel to the Company met with three of the
limited partners of the Knightsbridge Fund and with their counsel. Mr. Fickes
also attended the meeting on behalf of the general partner. The limited partners
who attended the meeting stated their view that the terms of the Original
Agreement were no longer fair and equitable, and that they were considering
action to protect the appreciated value of their investment in SW Financial.
Legal counsel for the limited partners attending the meeting expressed the view
that the Knightsbridge Fund should be compensated for the delay between the
originally anticipated closing at the end of the first quarter of 1997, and that
they should be further protected against a resale of SW Financial, or its
constituent parts, for a substantial premium. Mr. Player conveyed the
Knightsbridge Committee's proposal that the Company would pay interest on the
original purchase price from March 31, 1997. The original proposal did not
contemplate any "price protection" in the event of a subsequent resale of SW
Financial (in whole or in part). The limited partners advised Mr. Player that
they could not support the Knightsbridge Committee's proposal, and that any
proposal had to include a price protection feature.
The Chairman of the Knightsbridge Committee and the Company's counsel
reported the results of this meeting to the members of the Knightsbridge
Committee on November 19, 1997. The Knightsbridge
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Committee unanimously concluded that it was in the best interests of PennCorp's
shareholders for it to seek to resolve the possible dispute with the limited
partners. On November 25, 1997, after two additional meetings of the
Knightsbridge Committee and after several exchanges of proposals between the
Knightsbridge Committee and the Knightsbridge Fund, and after consultation with
the Company's legal and financial advisors, the Knightsbridge Committee, the
Knightsbridge Fund and Messrs. Stone and Fickes agreed in principle on revised
terms for the purchase of the SW Financial Controlling Interest.
Under the revised terms for the SW Financial Controlling Interest, the
parties have agreed that if the Amended Proposed Settlement (which takes into
account the terms of the revised transaction) is approved, Messrs. Stone and
Fickes will cancel their SW Financial common stock warrants for no consideration
and will give up their right to receive any increased consideration for their
$7,000,000 personal investment in SW Financial and the Company will acquire the
SW Financial Controlling Interest from the Knightsbridge Fund and Messrs. Stone
and Fickes for approximately $73,777,000 in cash (not including expenses) (the
"Base Purchase Price"), plus interest thereon at the rate of 13% per annum from
March 1, 1998 through the closing date. In addition, if, during the 12 months
ending November 25, 1998, the Company enters into a definitive agreement to sell
SW Financial (directly or in connection with a sale of the Company or its assets
substantially as a whole), or its constituent parts, the Company will pay the
holders of the SW Financial Controlling Interest, including Messrs. Stone and
Fickes, a one-time "price protection" payment under the circumstances described
below.
However, if the Amended Proposed Settlement is not approved, Messrs. Stone
and Fickes will retain their SW Financial warrants and will receive their
portion of the increased consideration for the SW Financial Controlling Interest
and the Company will purchase the SW Financial Controlling Interest for
approximately $77,444,000 (the "Revised Base Purchase Price"), plus interest
thereon at the rate of 13% per annum from January 1, 1998 through the closing
date. In addition, if, during the 12 months ending November 25, 1998, the
Company enters into a definitive agreement to sell SW Financial (directly or in
connection with a sale of the Company or its assets substantially as a whole),
or its constituent parts, the Company will pay the holders of the SW Financial
Controlling Interest, including Messrs. Stone and Fickes, a one-time "price
protection" payment under the circumstances described below.
If during the 12 months ending November 25, 1998 the Company enters into a
definitive agreement to sell SW Financial as a whole, the amount to be paid to
the holders of the SW Financial Controlling Interest (including Messrs. Stone
and Fickes) for the purchase price protection right will be calculated based
upon amounts received by the Company for its SW Financial common stock in excess
of $298,718,000, which is approximately 115% of $259,755,000 (the equity value
of SW Financial implied by the Base Purchase Price), multiplied by 31.10% if the
Amended Proposed Settlement is approved or multiplied by 32.79% if the Amended
Proposed Settlement is not approved. If during the 12 months ending November 25,
1998 the Company enters into a definitive agreement to sell constituent parts of
SW Financial, the holders of the SW Financial, Controlling Interest will receive
31.10% of the proceeds in excess of 115% of the portion of the Base Purchase
Price allocable to the constituent part being sold if the Amended Proposed
Settlement is approved or 32.79% of the proceeds in excess of 115% of the
portion of the implied equity value of SW Financial allocable to the constituent
part being sold if the Amended Proposed Settlement is not approved. The
allocation of the implied equity value of SW Financial to the constituent parts
of SW Financial is currently being negotiated by PennCorp and representatives of
the Knightsbridge Fund. If during the 12 months ending November 25, 1998 the
Company enters into a definitive agreement to sell SW Financial in connection
with a sale of the Company, the amount to be paid to the holders of the SW
Financial Controlling Interest (including Messrs. Stone and Fickes) for the
purchase price protection right will be calculated based upon the product of (i)
(x) 2,092,023 ($67,500,000, the purchase price of the SW Financial Controlling
Interest if the Original Proposed Settlement had been approved, divided by
$32.25, the price of the PennCorp Common Stock at March 31, 1997, the time the
consummation of the purchase of the SW Financial Controlling Interest had been
anticipated to occur) if the Amended Proposed Settlement is approved or (y)
2,156,186 ($69,537,000, the purchase price of the SW Financial Controlling
Interest if the Original Proposed Settlement had not been approved, divided by
$32.25) if the Amended Proposed Settlement is not approved, and (ii) the per
share consideration for the sale of the Company in excess of $37.09, which
represents 115% of $32.25, less
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(iii)(x) $6,277,000 (which represents the difference between the Base Purchase
Price and the purchase price of the SW Financial Controlling Interest had the
Original Proposed Settlement been approved) if the Amended Proposed Settlement
is approved or (y) $7,907,000 (which represents the difference between the
Revised Base Purchase Price and the purchase price of the SW Financial
Controlling Interest had the Original Proposed Settlement been approved) if the
Amended Proposed Settlement is not approved.
If the Amended Proposed Settlement is approved, Messrs. Stone and Fickes
will share $20,369,000 (or approximately 27.6%) of the Base Purchase Price, and
will receive their proportionate share of any interest paid on the Base Purchase
Price plus any payment made in respect of the purchase price protection right.
Of their $20,369,000 portion of the Base Purchase Price, approximately
$12,880,000 will be paid to them by the Company in respect of their $7,000,000
personal investment in SW Financial (representing the same amount they would
have received under the Original Agreement, had the Original Proposed Settlement
been approved) and approximately $7,489,000 will be paid to them by the
Knightsbridge Fund in accordance with its agreement of limited partnership. If
the Amended Proposed Settlement is not approved, Messrs. Stone and Fickes will
share $24,775,000 (or approximately 32.0%) of the Revised Base Purchase Price,
and will receive their proportionate share of any interest paid on the Revised
Base Purchase Price and of any payment made in respect of the purchase price
protection right. Of their $24,775,000 portion of the Revised Base Purchase
Price, approximately $17,471,000 will be paid to them by the Company in respect
of their $7,000,000 personal investment in SW Financial (including their SW
Financial warrants) and approximately $7,305,000 will be paid to them by the
Knightsbridge Fund in accordance with its agreement of limited partnership. From
these amounts, Messrs. Stone and Fickes will pay Mr. Greenberg $728,765 if the
Amended Proposed Settlement is approved and $732,392 if the Amended Proposed
Settlement is not approved.
In deciding to recommend the revised terms for the purchase of the SW
Financial Controlling Interest, the Knightsbridge Committee took into account
the following factors:
- Their belief that a consolidation of the voting control and unified
operations of SW Financial would be beneficial to ultimate stockholder
value and flexibility of operations.
- The substantial delay in consummating the purchase of the SW Financial
Controlling Interest, which the Knightsbridge Committee believes the
limited partners of the Knightsbridge Fund reasonably anticipated would
have occurred by March 31, 1997.
- The fact that three of the limited partners had expressed a willingness
to take action to protect the appreciated value of their investment in SW
Financial.
- The advice of legal counsel to the Company to the effect that litigation
to enforce the Original Agreement had certain risks and, therefore, there
could be no absolute assurance that the Company would prevail.
- Their belief that it is not in the best interests of the Company and its
shareholders to sue to enforce the Original Agreement in light of (i) the
further delay that would result in the Company's ability to consummate
the Knightsbridge restructuring plan, (ii) the important business
relationships between the Company and the limited partners of the
Knightsbridge Fund, who have been among the Company's bank lenders for
the past seven years and who have been among the Company's leading
sources of possible acquisition transactions and (iii) the substantial
fees and expenses the Company would incur in any lawsuit to enforce the
Original Agreement.
- The fact that the increased cash purchase price for the SW Financial
Controlling Interest equalled the proportionate interest of the
Knightsbridge Fund and Messrs. Stone and Fickes in SW Financial's 1997
estimated net income.
- The fact that PennCorp will control the decision whether and when to sell
SW Financial (in whole or in part) and that the purchase price protection
right would not become operative unless PennCorp realized a 15% gain on
its investment in SW Financial.
- The fact that Smith Barney had advised the Knightsbridge Committee that,
after taking into account the revised terms for the acquisition of the SW
Financial Controlling Interest, it could reaffirm its
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opinion that the consummation of that transaction is fair to the Company
and its stockholders from a financial point of view.
After taking the foregoing matters into account, and after considering the
fact that the parties have agreed in principle to amend the Original Proposed
Settlement to take into account the revised terms of the purchase of the SW
Financial Controlling Interest, the PennCorp Board (Messrs. Stone, Fickes and
Greenberg abstaining) approved the revised terms for the purchase of the SW
Financial Controlling Interest on December 1, 1997.
The Company has obtained all consents and approvals, other than stockholder
approval (and, depending on the Company's leverage ratio on the date of
purchase, a possible bank waiver), necessary to consummate the acquisition of
the SW Financial Controlling Interest.
Opinion of Financial Advisor -- SW Financial Controlling Interest. On
January 15, 1997, Smith Barney delivered orally its opinion (and subsequently
confirmed in writing on January 22, 1997) that the consideration originally
proposed to be paid by PennCorp for the SW Financial Controlling Interest was
fair to PennCorp and its stockholders (other than Messrs. Stone and Fickes) from
a financial point of view. Taking into account the revised terms for the
purchase of the SW Financial Controlling Interest, as described above, Smith
Barney has reaffirmed its fairness opinion as of the date of this Proxy
Statement and, in so doing, reviewed the analyses used to render its January 22,
1997 opinion, the assumptions upon which such analyses were based, and the
factors considered in connection therewith.
THE FULL TEXT OF SMITH BARNEY'S JANUARY 22, 1997 WRITTEN OPINION AND ITS
WRITTEN AFFIRMATIVE THEREOF, WHICH SETS FORTH THE ASSUMPTIONS MADE, THE MATTERS
CONSIDERED, THE SCOPE OF LIMITATIONS ON THE REVIEW UNDERTAKEN AND THE PROCEDURES
FOLLOWED BY SMITH BARNEY IN RENDERING SUCH OPINION ARE ATTACHED AS ANNEX B TO
THIS PROXY STATEMENT AND ARE INCORPORATED HEREIN BY REFERENCE. STOCKHOLDERS OF
PENNCORP ARE URGED TO, AND SHOULD, READ THE SMITH BARNEY OPINION CAREFULLY AND
IN ITS ENTIRETY. SMITH BARNEY'S OPINION IS ADDRESSED TO THE PENNCORP BOARD AND
ADDRESSES ONLY THE FAIRNESS, FROM A FINANCIAL POINT OF VIEW, TO PENNCORP AND ITS
STOCKHOLDERS (OTHER THAN MESSRS. STONE AND FICKES) OF THE CONSIDERATION TO BE
PAID BY PENNCORP FOR THE SW FINANCIAL CONTROLLING INTEREST AND DOES NOT
CONSTITUTE A RECOMMENDATION TO ANY PENNCORP STOCKHOLDER AS TO HOW SUCH
STOCKHOLDER SHOULD VOTE AT THE ANNUAL MEETING. THE SUMMARY OF THE SMITH BARNEY
OPINION SET FORTH IN THIS PROXY STATEMENT IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE FULL TEXT OF SUCH OPINION.
In arriving at its opinion, Smith Barney, among other things, spoke with
Messrs. Stone and Fickes and other senior executives of the Company and of SW
Financial to discuss various matters with respect to the business, operations
and other prospects of SW Financial and examined certain business, legal and
financial information relating to SW Financial, as well as certain financial
forecasts and other data for SW Financial provided to it by SW Financial,
PennCorp and Messrs. Stone and Fickes. Smith Barney also analyzed certain
financial, stock market and other publicly available information relating to
other companies whose operations it considered relevant in evaluating the
operations of SW Financial. Smith Barney also considered such other financial,
economic and market criteria as it deemed necessary in arriving at its opinion.
The Smith Barney opinion is necessarily based upon economic, market and other
conditions as in effect on, and the information available to it as of, the date
of the opinion.
In rendering its opinion, Smith Barney assumed and relied, without
independent verification, upon the accuracy and completeness of all financial
and other information publicly available or furnished to it or otherwise
discussed with it. With respect to financial forecasts and other information
provided to or otherwise discussed with it, Smith Barney assumed that such
forecasts and other information were reasonably prepared and were based upon and
reflected the best currently available estimates and judgments of the management
of SW Financial and PennCorp, including Messrs. Stone and Fickes, as to the
expected future financial performance of SW Financial and certain other
entities.
In addition, Smith Barney assumed, without independent analysis and with
the permission of the PennCorp Board, the fairness to PennCorp and its
stockholders of the transactions and events described in this
21
<PAGE> 24
Proxy Statement under the heading "-- The PennCorp/Knightsbridge
Relationship -- The SW Financial Investment."
The following is a brief summary of the analysis performed by Smith Barney
and reviewed with the PennCorp Board on January 15, 1997:
Comparable Public Company Analysis. Using publicly available information,
Smith Barney compared selected historical stock, financial and operating ratios
for SW Financial with corresponding data and ratios of a selected group of
similar publicly traded companies. These companies were selected by Smith Barney
from the universe of possible companies based upon Smith Barney's views as to
the comparability of financial and operating characteristics of these companies
to SW Financial. Smith Barney made comparisons with the following companies:
ALLIED Life Financial Corporation, American Heritage Life Investment
Corporation, Kansas City Life Insurance Company, Protective Life Corporation,
Security-Connecticut Corporation and USLIFE Corporation (the "Comparable
Companies").
Public Market Multiples. As part of its analysis, Smith Barney compared the
market price per share as a multiple of (i) First Call earnings estimates for
1996, (ii) First Call earnings estimates for 1997 and (iii) expected book value
(excluding effects of Statement of Financial Accounting Standard No. 115 ("FAS
115")) as of December 31, 1996. An analysis of the multiples for the Comparable
Companies yielded (i) multiples of the current market price per share to First
Call expected earnings estimates for 1996 of 9.7x to 13.5x with a median of
10.9x, (ii) multiples of the current market price per share to First Call
expected earnings for 1997 of 8.9x to 12.0x with a median of 10.0x and (iii)
multiples of the current market price per common share to estimated book value
per share at December 31, 1996 (excluding FAS 115) of .87x to 2.02x with a
median of 1.12x. Applying (i) multiples of 9.7x to 13.5x to expected earnings
for 1996, (ii) multiples of 8.9x to 12.0x to expected earnings for 1997 and
(iii) multiples of .87x to 2.02x to estimated book value at December 31, 1996,
Smith Barney calculated ranges of implied values for the SW Financial
Controlling Interest of $63.6 million to $90.7 million, $61.8 million to $85.7
million, and $34.7 million to $90.0 million, respectively.
Price to Book vs. ROE Analysis. Smith Barney also compared the relationship
between price to estimated December 31, 1996 book value multiples and projected
1997 returns on equity of SW Financial and the Comparable Companies (the "ROE
Analysis"). Based upon the relationships between price to estimated book value
multiples and projected 1997 returns on equity for the Comparable Companies and
SW Financial's projected 1997 return on equity, the implied multiple of SW
Financial's estimated book value at December 31, 1996 was used to determine an
implied equity value for SW Financial. Such analysis was based upon three
capital structures: (i) the existing SW Financial capital structure of 57.7%
debt and preferred stock to total capitalization, (ii) an adjusted capital
structure of 30% debt and preferred stock to total capitalization and (iii) an
adjusted capital structure of 25% debt and preferred stock to total
capitalization. Applying the ROE Analysis assuming the three capital structures
described above, Smith Barney calculated ranges of implied values for the SW
Financial Controlling Interest of $80.6 million to $80.8 million, $68.7 million
to $69.1 million, and $63.7 million to $64.1 million, respectively.
No company utilized in the Comparable Companies analysis as a comparison is
identical to SW Financial. Accordingly, an analysis of the results of the
foregoing necessarily involves complex considerations and judgments concerning
financial and operating characteristics of SW Financial and other factors that
could affect the public trading value of the Comparable Companies or company to
which it is being compared. Mathematical analysis (such as determining the
average or the median) is not itself a meaningful method of using comparable
public company data.
Precedent Analysis. Using publicly available information, Smith Barney
performed an analysis of 17 precedent transactions in the life insurance
business segments (the "Relevant Transactions") that Smith Barney deemed
comparable to the purchase of the SW Financial Controlling Interest in order to
calculate a valuation range. The Relevant Transactions, which included two
then-pending transactions, consisted of the following transactions: Washington
National Corporation/PennCorp Financial Group, Inc., American Life Holding
Corp./Conesco, Inc., Bankers Life Holding Corp./Conesco, Inc., Consumer Benefit
Life (Willis Corroon)/Gerling Global U.S., Golden American Life/Equitable Life
Ins. Co. of Iowa, Life Partners Group,
22
<PAGE> 25
Inc./Conesco, Inc., Life Insurance Company of Virginia/GE Capital Corp.,
Independent Insurance Group/American General Corp., Alexander Hamilton
Life/Jefferson-Pilot Corp., Laurentian Capital/American Annuity Group, John
Deere Life/Life Re Corporation, Victory Life Insurance/Americo Life Inc., Lamar
Financial Group Inc./Life Partners Group Inc., Integon Life Corp./PennCorp
Financial Group, Inc., USLICO/NWNL, and Harcourt General Inc./GE Capital Corp.
Such analysis indicated that the Relevant Transactions aggregate equity
consideration as a multiple of (i) last 12 months net operating income ranged
from 4.2x to 16.4x with an average of 10.8x, (ii) GAAP book value ranged from
.76x to 1.94x with an average of 1.11x and (iii) an analysis of statutory
surplus. This analysis resulted in an average implied valuation range of $24.1
million to $108.3 million.
In connection with the reaffirmation of its opinion as of the date of this
Proxy Statement, Smith Barney again spoke with Messrs. Stone and Fickes and
other senior executives of the Company to discuss various matters with respect
to the business, operations and prospects of SW Financial and examined updated
financial information and financial forecasts for SW Financial provided to it by
SW Financial, PennCorp and Messrs. Stone and Fickes.
In rendering the reaffirmation of its opinion, Smith Barney again analyzed
certain financial, stock market and other publicly available information
relating to companies whose operations it considered relevant in evaluating the
operations of SW Financial (the "Updated Comparable Company Analysis") and, in
addition to the precedent analysis described above, performed an analysis of
more recent precedent transactions in the life insurance business segments that
Smith Barney considered comparable to the purchase of the SW Financial
Controlling Interest (the "Updated Precedent Analysis").
For the Updated Comparable Company Analysis, Smith Barney made comparisons
to the following companies: ALLIED Life Financial Corporation, American Heritage
Life Investment Corporation, Kansas City Life Insurance Company, Protective Life
Corporation, FBL Financial Group, Inc. and Life USA Holdings, Inc.
Security-Connecticut Corporation and USLIFE Corporation, which were included
among the Comparable Companies described above, were acquired in transactions
that were announced subsequent to January 22, 1997.
For the Updated Precedent Analysis, Smith Barney reviewed its analysis of
sixteen of the seventeen precedent transactions described above (the Washington
National Corporation/PennCorp Financial Group, Inc. transaction was not
consummated) and performed an analysis of the following twelve additional
transactions: Home Beneficial Corporation/American General Corporation, USLIFE
Corporation/American General Corporation, Chubb Life Insurance Company of
America/Jefferson-Pilot Corporation, Security-Connecticut Corporation/ReliaStar
Financial Corporation, Westcoast Life Insurance Co./Protective Life Insurance
Co., Colonial Penn and Providential Life Insurance/Conseco, Inc., Reliable Life
Insurance Co./ Unitrin, Inc., Delta Life/AmerUS Life Holdings, Inc., Security
First Group/Metropolitan Life Insurance Company, WM Life Insurance Co./SAFECO
Life Insurance Co., AmVestors Financial Corp./AmerUS Life Holdings, Inc., and
Washington National Corporation/Conseco, Inc.
Smith Barney reviewed its Updated Comparable Company Analysis, including
its analysis of public market multiples and its price to book vs. ROE analysis,
and its Updated Precedent Analysis with the PennCorp Board on December 1, 1997.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to a partial analysis or summary description. In
arriving at its opinion, Smith Barney considered the results of all its analyses
as a whole and did not attribute any particular weight to any analysis or factor
considered by it. Smith Barney believes that selecting a portion of Smith
Barney's analysis, without considering all analyses, would create an incomplete
view of the process underlying its opinion. In addition, Smith Barney may have
deemed various assumptions more or less probable than other assumptions, so that
ranges of valuations resulting for any particular analysis described above
should not be taken to be Smith Barney's view of actual value of the SW
Financial Controlling Interest. Smith Barney received a fee of $250,000 plus
out-of-pocket expenses including attorney's fees for analyzing the fairness,
from a financial point of view, of that transaction, which fee was not dependent
upon Smith Barney's conclusions regarding the fairness of that transaction. In
the ordinary course of its business, Smith Barney and its affiliates may
actively trade the equity and/or debt securities of
23
<PAGE> 26
PennCorp for their own account or for the account of customers and, accordingly,
may at any time hold a long or short position in such securities.
Proposed Settlement of Shareholder Litigation. As discussed above, on
January 11 and January 25, 1996, shareholder derivative suits relating to the SW
Financial Investment were initiated against the Company and the members of the
PennCorp Board. The defendants in the Tozour case have filed a motion seeking
its dismissal on the ground that the plaintiff failed to comply with the
requirements of Delaware law before instituting a derivative suit, and intend to
defend the lawsuit vigorously. Because the defendants have not been served with
the Miller complaint, no action has been taken in that case, although the
defendants would also defend it vigorously. The defendants believe, however,
that it would not be in the best interests of PennCorp and its shareholders to
expend considerable management and director time and to incur substantial
expenses to litigate these actions. Consequently, PennCorp's legal advisors have
met or spoken by telephone with the plaintiffs' counsel on several occasions to
discuss the terms of a potential settlement. The shareholder derivative suits
were a factor considered by the PennCorp Board in its decision to restructure
the PennCorp/Knightsbridge relationship and to acquire The Fickes and Stone
Knightsbridge Interests and the SW Financial Controlling Interest.
The defendants and the plaintiffs' counsel entered into a stipulation of
settlement on March 28, 1997 (the "Original Proposed Settlement"). The Original
Proposed Settlement consisted of the following principal elements: (i) Messrs.
Stone and Fickes will cancel the 335,564 SW Financial common stock warrants they
hold for no consideration enabling PennCorp to purchase the SW Financial
Controlling Interest for $67,500,000, reducing the price to be paid by PennCorp
for the SW Financial Controlling Interest by approximately $2,037,000, (ii) the
PennCorp Board will proceed with the purchase of The Fickes and Stone
Knightsbridge Interests, having received a fairness opinion of a nationally
recognized investment banking firm with respect to the price to be paid for The
Fickes and Stone Knightsbridge Interests, (iii) the PennCorp Board will proceed
with the acquisition of the SW Financial Controlling Interest, having received a
fairness opinion of a nationally recognized investment banking firm with respect
to the price to be paid for the SW Financial Controlling Interest, (iv) the
PennCorp Board will submit the purchases of The Fickes and Stone Knightsbridge
Interests and the SW Financial Controlling Interest to a shareholder vote of a
majority of the PennCorp stockholders present at a meeting and entitled to vote,
and stockholders must approve both transactions, (v) Messrs. Stone and Fickes
will abstain from voting on the proposals to approve the purchase of The Fickes
and Stone Knightsbridge Interests and the SW Financial Controlling Interest, and
(vi) the plaintiffs' counsel will be entitled to conduct confirmatory discovery.
On December 1, 1997, the defendants and the plaintiffs' counsel agreed in
principle to amend the Original Proposed Settlement (as so amended, the "Amended
Proposed Settlement"). The terms of the Amended Proposed Settlement are
identical to the terms of the Original Proposed Settlement, except that the
Amended Proposed Settlement provides that the Company will acquire the SW
Financial Controlling Interest for $73,777,000, reducing the price to be paid by
PennCorp for the SW Financial Controlling Interest by $3,667,000 taking into
account the cancellation of the SW Financial warrants held by Messrs. Stone and
Fickes and the fact that Messrs. Stone and Fickes will not participate in the
increased consideration (other than interest thereon after March 1, 1998 and the
possible price protection right) for the SW Financial Controlling Interest to
the extent it relates to their $7,000,000 personal investment in SW Financial.
In addition, pursuant to the Amended Proposed Settlement, the Company will only
pay interest on the Base Purchase Price if the acquisition of the SW Financial
Controlling Interest does not occur by March 1, 1998 (as opposed to January 1,
1998, as originally required by the Knightsbridge Fund). The Amended Proposed
Settlement also requires Messrs. Stone and Fickes to grant PennCorp a price
protection right in the event of a sale of their Portsmouth investment as
described in "-- Acquisition of The Fickes and Stone Knightsbridge Interests."
The Amended Proposed Settlement is subject to approval by the Chancery
Court after notice to PennCorp stockholders. As discussed above, Messrs. Stone
and Fickes have agreed that, if the Amended Proposed Settlement is approved by
the Chancery Court, they will cancel their SW Financial common stock warrants
and they will not participate in the increased consideration (other than
interest thereon after March 1, 1998 and the possible price protection right)
for the SW Financial Controlling Interest to the extent it relates to their
$7,000,000 personal investment in SW Financial, which together will reduce the
price to be
24
<PAGE> 27
paid by PennCorp for the SW Financial Controlling Interest by approximately
$3,667,000. Because the Knightsbridge restructuring will have the effect of
substantially eliminating potential future conflicts of interest between Messrs.
Stone and Fickes and PennCorp, and because the Amended Proposed Settlement will
have the effect of reducing the price to be paid for the SW Financial
Controlling Interest and will obviate the need to expend considerable management
and director time to litigate the actions, the PennCorp Board has determined
that the Amended Proposed Settlement is in the best interests of PennCorp and
its shareholders and confers a substantial economic benefit on PennCorp.
Accordingly, the PennCorp Board has authorized the payment to plaintiffs'
counsel of legal fees of $785,000 and documented expenses not to exceed $50,000
in connection with the lawsuits and the related settlement negotiations, if the
Amended Proposed Settlement is approved by the Delaware Chancery Court after
notice to PennCorp stockholders.
IF PENNCORP STOCKHOLDERS APPROVE THE PURCHASE OF THE FICKES AND STONE
KNIGHTSBRIDGE INTERESTS AND THE SW FINANCIAL CONTROLLING INTEREST ON THE TERMS
CONTAINED HEREIN, PENNCORP INTENDS TO CONSUMMATE THOSE TRANSACTIONS, WHETHER OR
NOT THE AMENDED PROPOSED SETTLEMENT IS APPROVED. HOWEVER, IF PENNCORP
STOCKHOLDERS DO NOT APPROVE BOTH OF THOSE TRANSACTIONS, THERE WILL NOT BE A
SETTLEMENT OF THE SHAREHOLDER DERIVATIVE LITIGATION ON THE TERMS DISCUSSED
HEREIN AND MESSRS. STONE AND FICKES AND THE KNIGHTSBRIDGE COMMITTEE WILL
RECONVENE THEIR NEGOTIATIONS ON THE DEFINITIVE TERMS OF THE KNIGHTSBRIDGE
RELATIONSHIP. THE AMENDED PROPOSED SETTLEMENT IS CONDITIONED UPON, AMONG OTHER
THINGS, PENNCORP STOCKHOLDER APPROVAL OF THE PURCHASE BY PENNCORP OF THE FICKES
AND STONE KNIGHTSBRIDGE INTERESTS AND THE SW FINANCIAL CONTROLLING INTEREST AND
COURT APPROVAL AFTER NOTICE TO PENNCORP STOCKHOLDERS.
OTHER RELATIONSHIPS
Maurice W. Slayton, a director of the Company, is the Chairman of the
Board, President and Chief Executive Officer of Conning & Company ("Conning")
and President of Conning Corporation, the parent of Conning. Conning provides
portfolio management and related services for a portion of the investment assets
of the Company's insurance subsidiaries. In 1996, Conning earned aggregate fees,
including reimbursement of actual out-of-pocket expenses, in the approximate
amount of $895,000 for investment management services.
25
<PAGE> 28
SELECTED UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following selected unaudited pro forma financial information (the
"Selected Pro Forma Financial Information") has been prepared to illustrate the
pro forma effects of (i) the sale of 5,131,300 shares of PennCorp Common Stock
in February 1996 and the use of the proceeds therefrom, (ii) PennCorp's
acquisition of UC Life on July 24, 1996, including the financing thereof, (iii)
the sale of 2,875,000 shares of PennCorp $3.50 Series II Convertible Preferred
Stock in August 1996 and the use of the proceeds therefrom, (iv) the March 14,
1997, redemption of the Series B Redeemable Preferred Stock, (v) consolidation
of the results of operations and financial position of SW Financial due to the
acquisition of the SW Financial Controlling Interest by PennCorp, including the
financing thereof, and (vi) the acquisition of The Fickes and Stone
Knightsbridge Interests, including the financing thereof.
In August 1997, the Company announced 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, and the three
and six month periods ended June 30, 1997. Additional information regarding the
effects of the restatement is available on PennCorp's Form 8-K filed on November
14, 1997 and incorporated herein by reference.
The pro forma statements of operations for the year ended December 31,
1996, and for the nine month period ended September 30, 1997, give effect to the
foregoing transactions as though each had occurred on January 1, 1996. The pro
forma balance sheet as of September 30, 1997, give effect to the acquisition of
the SW Financial Controlling Interest, including the financing thereof, and the
acquisition of The Fickes and Stone Knightsbridge Interests, as though each
transaction had occurred as of September 30, 1997. The proposed investment in
Portsmouth and the impact of any additional consideration, in the form of an
interest component, should the acquisition of the SW Financial Controlling
Interest not occur by March 1, 1998, have not been included in the Selected Pro
Forma Financial Information as their financial impact would not be material to
the Company.
The acquisitions of the SW Financial Controlling Interest and The Fickes
and Stone Knightsbridge Interests will be accounted for using the purchase
method of accounting. The total purchase price of the acquisitions will be
allocated to the tangible and intangible assets and liabilities acquired based
upon their respective fair values as of the consummation dates. The allocation
of the aggregate purchase price reflected in the Selected Pro Forma Financial
Information is preliminary and based upon assumed dates of January 1, 1996, and
September 30, 1997, for the Pro Forma Statements of Operations and the Pro Forma
Balance Sheet, respectively. The final allocation of the purchase price is
contingent upon determination of the fair values of the acquired assets and
liabilities; however, that allocation is not expected to differ materially from
the preliminary allocation.
There are two significant types of pro forma transactions, "Pro Forma A",
those transactions previously consummated, and "Pro Forma B", those transactions
which will be presented for common shareholder consideration at the Annual
Meeting. These pro forma transactions are defined as follows:
PRO FORMA A: The information appearing under this caption gives pro
forma effect to the transactions described in clauses (i), (ii), (iii) and
(iv) in the first paragraph above for the year ended December 31, 1996, and
(iv) for the nine month period ended September 30, 1997 (collectively, the
"Consummated Acquisitions/Transactions").
PRO FORMA B: The information appearing under this caption gives pro
forma effect to the Consummated Acquisitions/Transactions, together with
the transactions described in clauses (v) and (vi) above (collectively, the
"Proposed Acquisitions/Transactions").
The Selected Pro Forma Financial Information is not necessarily indicative
of either future results of operations or the results that might have occurred
had the above-described transactions been consummated on the indicated dates.
The Selected Pro Forma Financial Information should be read in conjunction with
the historical financial statements and related notes of PennCorp, UC Life and
SW Financial incorporated by reference in the Proxy Statement of which this
Selected Pro Forma Financial Information is a part.
26
<PAGE> 29
PRO FORMA STATEMENT OF OPERATIONS
(UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
CONSUMMATED ACQUISITIONS/TRANSACTIONS
---------------------------------------------------------------------------------------------
HISTORICAL ADJUSTMENTS
----------------------- ---------------------------------------------------
1996 CONVERTIBLE
PREFERRED STOCK RETIREMENT OF
1996 INSURANCE AND SERIES B
PENNCORP COMMON STOCK UC LIFE REDEEMABLE
(AS RESTATED) UC LIFE INSURANCE ACQUISITION PREFERRED STOCK PRO FORMA A
------------- ------- ------------ ---------------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
OPERATING INFORMATION:
Revenues:
Policy revenues................. $348,090 $5,153 $353,243
Net investment income........... 210,734 66,421 277,155
Other income.................... 22,666 52 22,718
Net gains (losses) from the sale
of investments................. 1,257 (1,592) (335)
-------- ------- --------
Total revenues............... 582,747 70,034 652,781
-------- ------- --------
Benefits and expenses:
Claims incurred................. 188,727 48,786 237,513
Change in liability for future
policy benefits and other
policy benefits................ 83,184 (385) 82,799
Amortization:
Present value of insurance in
force and deferred policy
acquisition costs............ 56,470 9,699 (4,054)(3),(4) 62,115
Costs in excess of net assets
acquired..................... 8,648 -- 833(5a) 9,481
Underwriting and other
administrative expenses........ 116,560 9,753 (2,046)(6) 124,267
Interest and amortization of
deferred debt issuance costs... 18,579 -- (1,827)(7a) 1,171(7b) 1,029(7c) 18,952
-------- ------- --------
Total benefits and
expenses.................... 472,168 67,853 535,127
-------- ------- --------
Income before income taxes,
undistributed earnings in
unconsolidated affiliates,
discontinued operations and
extraordinary charge............ 110,579 2,181 117,654
Income tax expense........... 40,957 769 639(8) 2,492(8) (360)(8) 44,497
-------- ------- --------
Net income before undistributed
earnings in unconsolidated
affiliates and extraordinary
charge.......................... 69,622 1,412 73,157
Undistributed earnings in
unconsolidated affiliates... 21,037 -- 21,037
-------- ------- --------
Net income before extraordinary
charge.......................... 90,659 1,412 94,194
Preferred stock dividend
requirements................ 14,646 -- 6,036(10) (1,382)(7c) 19,300
-------- ------- --------
Net income applicable to common
stock before extraordinary
charge.......................... $ 76,013 $1,412 $ 74,894
======== ======= ========
PER SHARE INFORMATION:
Net income applicable to common
stock before extraordinary
charge.......................... $ 2.67 $ 2.63
======== ========
Fully diluted net income
applicable to common stock
before extraordinary charge..... $ 2.49 $ 2.63
======== ========
Weighted average primary shares
outstanding (in thousands)...... 28,462 28,462
======== ========
Weighted average fully diluted
shares outstanding (in
thousands)...................... 35,229 35,229
======== ========
<CAPTION>
PROPOSED ACQUISITIONS/TRANSACTIONS
---------------------------------------------------------------------------------
HISTORICAL ADJUSTMENTS
------------------------------ --------------------------------
ACQUISITION OF
THE FICKES
AND STONE
SW FINANCIAL KNIGHTSBRIDGE SW FINANCIAL KNIGHTSBRIDGE
(AS RESTATED) MANAGEMENT CONSOLIDATION INTERESTS PRO FORMA B
-------------- ------------- ------------- -------------- -----------
<S> <C> <C> <C> <C> <C>
OPERATING INFORMATION:
Revenues:
Policy revenues................. $196,912 $ -- $550,155
Net investment income........... 128,692 -- (2,754)(1) 730(2) 403,823
Other income.................... 27,439 10,146 (8,920)(2) 51,383
Net gains (losses) from the sale
of investments................. 516 -- 181
-------- ------ --------
Total revenues............... 353,559 10,146 1,005,542
-------- ------ --------
Benefits and expenses:
Claims incurred................. 211,460 -- 448,973
Change in liability for future
policy benefits and other
policy benefits................ (13,616) -- 69,183
Amortization:
Present value of insurance in
force and deferred policy
acquisition costs............ 23,392 -- 85,507
Costs in excess of net assets
acquired..................... 4,130 -- 1,483(5b) 1,429(5c) 16,523
Underwriting and other
administrative expenses........ 65,110 9,581 (5,642)(2) 193,316
Interest and amortization of
deferred debt issuance costs... 14,052 -- 2,468(7d) 658(7e) 36,130
-------- ------ --------
Total benefits and
expenses.................... 304,528 9,581 849,632
-------- ------ --------
Income before income taxes,
undistributed earnings in
unconsolidated affiliates,
discontinued operations and
extraordinary charge............ 49,031 565 155,910
Income tax expense........... 18,149 -- (1,172)(8) (1,122)(8) 60,352
-------- ------ --------
Net income before undistributed
earnings in unconsolidated
affiliates and extraordinary
charge.......................... 30,882 565 95,558
Undistributed earnings in
unconsolidated affiliates... -- -- (21,037)(9) --
-------- ------ --------
Net income before extraordinary
charge.......................... 30,882 565 95,558
Preferred stock dividend
requirements................ 2,754 -- (2,754)(1) 19,300
-------- ------ --------
Net income applicable to common
stock before extraordinary
charge.......................... $ 28,128 $ 565 $ 76,258
======== ====== ========
PER SHARE INFORMATION:
Net income applicable to common
stock before extraordinary
charge.......................... $ 2.68
========
Fully diluted net income
applicable to common stock
before extraordinary charge..... $ 2.63
========
Weighted average primary shares
outstanding (in thousands)...... 28,462
========
Weighted average fully diluted
shares outstanding (in
thousands)...................... 35,575
========
</TABLE>
See accompanying Notes to Selected Unaudited Pro Forma Financial Information
27
<PAGE> 30
PRO FORMA STATEMENT OF OPERATIONS
(UNAUDITED)
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
CONSUMMATED TRANSACTION
--------------------------------------------
HISTORICAL ADJUSTMENTS
---------- ---------------
RETIREMENT OF
SERIES B
REDEEMABLE
PENNCORP PREFERRED STOCK PRO FORMA A
---------- --------------- -----------
<S> <C> <C> <C>
OPERATING INFORMATION:
Revenues:
Policy revenues................. $263,356 $263,356
Net investment income........... 206,256 206,256
Other income.................... 20,313 20,313
Net gains from sale of
investments................... 14,767 14,767
-------- --------
Total revenues.............. 504,692 504,692
-------- --------
Benefits and expenses:
Claims incurred................. 146,238 146,238
Change in liability for future
policy benefits and other
policy benefits............... 78,823 78,823
Amortization:
Present value of insurance in
force and deferred policy
acquisition costs........... 64,298 64,298
Costs in excess of net assets
acquired.................... 7,460 7,460
Underwriting and other
administrative expenses....... 101,058 101,058
Interest and amortization of
deferred debt issuance
costs......................... 15,719 206(7c) 15,925
Restructuring charge............ 19,071 19,071
-------- --------
Total benefits and
expenses................... 432,667 432,873
-------- --------
Income before income taxes,
undistributed earnings in
unconsolidated affiliate and
extraordinary charge............ 72,025 71,819
Income tax expense.......... 26,783 (72)(8) 26,711
-------- --------
Net income before undistributed
earnings in unconsolidated
affiliates and extraordinary
charge.......................... 45,242 45,108
Undistributed earnings in
unconsolidated
affiliates................. 16,158 16,158
-------- --------
Net income before extraordinary
charge.......................... 61,400 61,266
Preferred stock dividend
requirements............... 14,685 (17)(7c) 14,668
-------- --------
Net income applicable to common
stock before extraordinary
charge.......................... $ 46,715 $ 46,598
======== ========
PER SHARE INFORMATION(11):
Net income applicable to common
stock before extraordinary
charge.......................... $ 1.61 $ 1.61
======== ========
Fully diluted net income
applicable to common stock
before extraordinary
charge.......................... $ 1.57 $ 1.57
======== ========
Weighted average primary shares
outstanding (in thousands)...... 28,954 28,954
======== ========
Weighted average fully diluted
shares outstanding (in
thousands)...................... 38,161 38,161
======== ========
<CAPTION>
PROPOSED ACQUISITIONS/TRANSACTIONS
---------------------------------------------------------------------------------
HISTORICAL ADJUSTMENTS
----------------------------- ---------------------------------
ACQUISITION OF
THE FICKES
AND STONE
KNIGHTSBRIDGE SW FINANCIAL KNIGHTSBRIDGE
SW FINANCIAL MANAGEMENT CONSOLIDATION INTERESTS PRO FORMA B
------------ ------------- ------------- -------------- -----------
<S> <C> <C> <C> <C> <C>
OPERATING INFORMATION:
Revenues:
Policy revenues................. $110,419 $ -- $373,775
Net investment income........... 95,202 -- (2,664)(1)(7d) 1,735(2) 300,529
Other income.................... 12,889 16,982 (8,165)(2) 42,019
Net gains from sale of
investments................... 1,797 -- 16,564
-------- ------- --------
Total revenues.............. 220,307 16,982 732,887
-------- ------- --------
Benefits and expenses:
Claims incurred................. 156,145 -- 302,383
Change in liability for future
policy benefits and other
policy benefits............... (30,875) -- 47,948
Amortization:
Present value of insurance in
force and deferred policy
acquisition costs........... 15,296 -- 79,594
Costs in excess of net assets
acquired.................... 3,095 -- 1,112(5b) 1,071(5c) 12,738
Underwriting and other
administrative expenses....... 29,578 15,508 (6,430)(2) 139,714
Interest and amortization of
deferred debt issuance
costs......................... 10,332 -- 1,628(7d) 494(7e) 28,379
Restructuring charge............ -- -- 19,071
-------- ------- --------
Total benefits and
expenses................... 183,571 15,508 629,827
-------- ------- --------
Income before income taxes,
undistributed earnings in
unconsolidated affiliate and
extraordinary charge............ 36,736 1,474 103,060
Income tax expense.......... 13,786 -- (1,460)(8) (173)(8) 38,864
-------- ------- --------
Net income before undistributed
earnings in unconsolidated
affiliates and extraordinary
charge.......................... 22,950 1,474 64,196
Undistributed earnings in
unconsolidated
affiliates................. -- -- (16,158)(9) --
-------- ------- --------
Net income before extraordinary
charge.......................... 22,950 1,474 64,196
Preferred stock dividend
requirements............... 2,234 -- (2,234)(1) 14,668
-------- ------- --------
Net income applicable to common
stock before extraordinary
charge.......................... $20,716 $ 1,474 $ 49,528
======== ======= ========
PER SHARE INFORMATION(11):
Net income applicable to common
stock before extraordinary
charge.......................... $ 1.71
========
Fully diluted net income
applicable to common stock
before extraordinary
charge.......................... $ 1.62
========
Weighted average primary shares
outstanding (in thousands)...... 28,954
========
Weighted average fully diluted
shares outstanding (in
thousands)...................... 38,507
========
</TABLE>
See accompanying Notes to Selected Unaudited Pro Forma Financial Information
28
<PAGE> 31
PRO FORMA BALANCE SHEET
(UNAUDITED)
AS OF SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
PROPOSED ACQUISITIONS/TRANSACTIONS
--------------------------------------------------------------------------------
HISTORICAL ADJUSTMENTS
----------------------------- --------------------------------
ACQUISITION OF
THE FICKES
AND STONE
SW FINANCIAL KNIGHTSBRIDGE
PENNCORP SW FINANCIAL CONSOLIDATION INTERESTS PRO FORMA B
------------- ------------- ------------- -------------- -----------
<S> <C> <C> <C> <C> <C>
Invested assets......................... $3,649,958 $1,644,119 (40,000)(9) $5,254,077
Insurance assets........................ 634,760 107,159 741,919
Other assets............................ 534,945 404,819 (137,678)(9) 10,000(5c) 812,086
---------- ---------- ----------
Total assets.................... $4,819,663 $2,156,097 $6,808,082
========== ========== ==========
Insurance liabilities................... $3,353,135 $1,689,481 $5,042,616
Long-term debt.......................... 349,902 154,750 36,000(9) 10,000(5c) 550,652
Other liabilities....................... 226,429 98,188 324,617
Redeemable preferred stock.............. 19,430 36,112 (36,112)(9) 19,430
Convertible preferred stock............. 249,670 -- 249,670
Common shareholders' equity............. 621,097 177,566 (177,566)(9) 621,097
---------- ---------- ----------
Total liabilities and
shareholders' equity.......... $4,819,663 $2,156,097 $6,808,082
========== ========== ==========
</TABLE>
See Accompanying Notes to Selected Unaudited Pro Forma Financial Information.
29
<PAGE> 32
NOTES TO SELECTED UNAUDITED PRO FORMA FINANCIAL INFORMATION
(1) For the year ended December 31, 1996 and the nine month period ended
September 30, 1997, PennCorp's investment income includes $2.8 million and
$2.2 million, respectively, of preferred stock dividends, related to
PennCorp's preferred stock investment in SW Financial, which is eliminated
as part of the pro forma adjustments for the acquisition of the SW
Financial Controlling Interest.
(2) As a result of the acquisition of The Fickes and Stone Knightsbridge
Interests, PennCorp will consolidate the results of operations of
Knightsbridge Management, the management and investment advisory company
of Knightsbridge.
Certain intercompany transactions are eliminated as a result of such
consolidation. For the year ended December 31, 1996, amounts eliminated as
a result of the consolidation include: (i) transaction fee related to the
UC Life acquisition, $2.5 million (ii) management fees paid by UC Life, SW
Financial and PennCorp aggregating $4.7 million and (iii) investment
advisory fees paid by SW Financial and UC Life aggregating $1.7 million.
Investment advisory fees in excess of advisory expenses amounting to
$730,000 have been reclassified to net investment income.
For the nine month period ended September 30, 1997, amounts eliminated as
a result of the consolidation include: (i) management fees paid by UC
Life, SW Financial and PennCorp aggregating $3.8 million and (ii)
investment advisory fees paid by SW Financial and UC Life aggregating $4.4
million. Investment advisory fees in excess of advisory expense amounting
to $1.7 million have been reclassified to net investment income.
(3) Present value of insurance in force -- Each acquisition or merger has been
accounted for as a purchase transaction and as part of the purchase
accounting adjustments PennCorp establishes an asset for the present value
of the insurance in force as of the date of each such transaction based
upon the present value of future premiums or the emergence of gross
profits utilizing PennCorp's purchase accounting actuarial lapse and
interest rate assumptions.
As part of the pro forma purchase accounting adjustments for the UC Life
acquisition, PennCorp established a present value of insurance in force
asset of $69.1 million. This asset is determined based upon the present
value of future gross profits for the business acquired using appropriate
actuarial assumptions established by PennCorp and discounting such profits
at a risk rate of return of 20.0 percent. On a pro forma basis, the first
five years' expected amortization, based upon an average accretion rate of
5.4% and an estimated remaining life (amortization period) of 30 years, of
the present value of insurance in force related to the UC Life acquisition
as if such asset had been established on January 1, 1996, would be as
follows:
<TABLE>
<CAPTION>
GROSS INTEREST EXPECTED
AMORTIZATION ACCRETED AMORTIZATION
------------ -------- ------------
<S> <C> <C> <C>
1996...................................... 14,462 3,767 10,695
1997...................................... 12,071 3,171 8,900
1998...................................... 10,703 2,677 8,026
1999...................................... 9,288 2,227 7,061
2000...................................... 7,799 1,844 5,955
</TABLE>
Amortization of present value of insurance in force since the date of
acquisition, included in the Company's historical financial statements,
aggregated $5.1 million resulting in additional amortization of $5.6
million for the period January 1, 1996, to July 23, 1996.
(4) Deferred policy acquisition costs -- As described in Note 3 above,
PennCorp establishes a present value of insurance in force asset which
approximates the discounted value of anticipated profits of the business
in force as of the acquisition or merger date. As a result of establishing
such an asset, the historical amount for deferred policy acquisition costs
is eliminated.
Subsequent to the date of the acquisition or merger, deferred policy
acquisition costs are established and amortized for new business issuance
costs. Differences in historical and pro forma amortization of deferred
policy acquisition costs result from the different accounting bases,
including the establishment of the present value of insurance in force
asset.
30
<PAGE> 33
On a pro forma basis, based upon the annualization of UC Life's actual
amortization for the period from July 24, 1996, to December 31, 1996, the
amortization of deferred policy acquisition costs for UC Life for the
period from January 1, 1996, through July 23, 1996, are estimated to be
$10,000, resulting in a $9.7 million decrease for such period.
(5) Costs in excess of net assets acquired -- PennCorp establishes an asset
for costs in excess of net assets acquired to the extent that the
consideration for an acquisition or merger exceeds the value of the net
assets acquired. It is PennCorp's policy to amortize such costs on a
straight line basis over durations ranging from 7 to 30 years in which the
weighted average period is approximately twenty years.
(5a) The aggregate purchase price for UC Life was approximately $110.1 million
(including expenses incurred of $9.7 million and earnings through the date
of consummation of the UC Life acquisition of $3.6 million). The fair
value of the net assets acquired amounted to $81.5 million resulting in
costs in excess of net assets acquired of $28.6 million which are
amortized over a period of 20 years. On a pro forma basis, for the period
from January 1, 1996, through July 23, 1996, the amortization of costs in
excess of net assets acquired would be $833,000.
(5b) Assuming an acquisition date of January 1, 1996, the aggregate purchase
price for SW Financial, constituting the initial investment and the
acquisition of the SW Financial Controlling Interest, was approximately
$202.4 million (including estimated expenses incurred of $8.7 million).
The estimated fair value of the net assets acquired amounted to $157.9
million resulting in additional costs in excess of net assets acquired of
$44.5 million which are amortized over a period of 30 years. On a pro
forma basis, for the year ended December 31, 1996 and the nine month
period ended September 30, 1997, the additional amortization of costs in
excess of net assets acquired would be $1.5 million and $1.1 million,
respectively.
Assuming a September 30, 1997 acquisition date, the estimated fair value
of net assets acquired would be $177.6 million and PennCorp's investment
would be $210.0 million resulting in $32.4 million of costs in excess of
net assets acquired.
(5c) Subject to the satisfaction of certain conditions, PennCorp has agreed to
acquire The Fickes and Stone Knightsbridge Interests in exchange for
PennCorp's agreement to make annual cash payments to each of Messrs. Stone
and Fickes on each April 15, commencing on closing, and ending on April
15, 2001, and to deliver to each of Messrs. Stone and Fickes on April 15,
2001, 173,160 shares, 346,320 total shares, of PennCorp Common Stock
(subject to adjustment for stock splits, reverse stock splits, stock
dividends, spin offs, and similar transactions). The total number of
shares to be delivered to each of Messrs. Stone and Fickes, has been
calculated by dividing $5.0 million (the value agreed to by the PennCorp
Board and each of Messrs. Stone and Fickes for the sale of their
respective portions of The Fickes and Stone Knightsbridge Interests) by
$28.875 per share, the closing price of the PennCorp Common Stock on the
NYSE on April 15, 1996, the date on which the Knightsbridge Committee and
Messrs. Stone and Fickes reached agreement on the general terms of the
acquisition of The Fickes and Stone Knightsbridge Interests and the
effective date of the Fickes and Stone employment agreements. The new
employment agreements with Messrs. Fickes and Stone do not result in a
material difference from historical amounts of compensation.
As a result of the distribution of its partnership interests prior to the
acquisition by PennCorp, the net assets acquired will be negligible
resulting in costs in excess of net assets acquired of approximately $10.0
million. The costs in excess of net assets acquired will be amortized over
the remaining life of the limited partnership, or approximately 7 years,
resulting in pro forma amortization of $1.4 million and $1.1 million for
the year ended December 31, 1996, and the nine month period ended
September 30, 1997, respectively.
(6) On a pro forma basis, the costs associated with UC Life's service
agreement with its former parent, UC Financial, have been eliminated as
such agreement was canceled as of the closing date. PennCorp, with its
current cost structure, is able to perform any such similar services
required by UC Life without an incremental increase in overhead expenses.
Fees charged to UC Life under the service agreement amounted to $2.0
million for the period from January 1, 1996, through July 23, 1996.
31
<PAGE> 34
(7) Interest and amortization of deferred debt issuance costs -- In
conjunction with each of PennCorp's acquisitions or mergers, PennCorp has
utilized internally generated funds as well as various forms of financing.
In addition, proceeds from various offerings were utilized to repay
amounts outstanding under certain credit agreements.
(7a) Of the $156.8 million net proceeds of the February 1996 Common Stock
offering, PennCorp utilized $137.0 million to repay amounts outstanding
under certain of PennCorp's credit facilities and to pay approximately
$10.0 million to ICH in lieu of issuing an equivalent value of Common
Stock as part of the SW Financial Investment. The repayments of amounts
outstanding under certain credit facilities would have resulted in a
reduction in interest and related debt costs of $1.8 million for the year
ended December 31, 1996 which represents the interest expense incurred
from January 1, 1996, through the March 6, 1996, repayment date.
(7b) PennCorp's revolving credit borrowings increased by $32.2 million as a
result of the UC Life acquisition. The pro forma interest costs associated
with such incremental borrowings, assuming an interest rate of 6.5% which
approximates the Company's borrowing rate as of the acquisition date,
would have been $1.2 million for the period from January 1, 1996, through
July 23, 1996.
(7c) As part of the consideration for the acquisition of Integon Life, PennCorp
issued 127,500 shares of Series B Preferred Stock. On March 14, 1997,
PennCorp redeemed such shares for an aggregate consideration of $14.7
million, which was funded through borrowings under its revolving credit
facility. On a pro forma basis, dividends on the Series B Preferred Stock
would have decreased by $1.4 million and $17,000, respectively, for the
year ended December 31, 1996, and the period from January 1, 1997, to
March 14, 1997, and interest expense, assuming an interest rate of 7.0%,
would have increased by $1.0 million and $206,000, respectively, for the
year ended December 31, 1996, and the period from January 1, 1997, to
March 14, 1997.
(7d) SW Financial incurred approximately $160.0 million of indebtedness as part
of the acquisition of Southwestern Life and Union Bankers. The Company has
entered into a $450.0 million revolving credit facility (the "facility")
which will be utilized to finance the cash portion of the SW Financial
transactions. The facility has variable interest rate requirements,
currently 7.0%, based upon the Company's applicable credit ratings, as
determined by independent rating agencies, and matures in five years. In
addition, the facility requires the refinancing of the currently
outstanding indebtedness at SW Financial resulting in a pro forma
reduction in interest costs of $2.9 million and $1.9 million, respectively
for the year ended December 31, 1996 and the nine month period ended
September 30, 1997. On August 5, 1997, the Company acquired $40.0 million
of SW Financial subordinated debt in anticipation of the acquisition of
the SW Financial Controlling Interest. The Company recorded interest
income and SW Financial reported interest costs aggregating $430,000 for
the period from August 5, 1997, to September 30, 1997. Such amounts have
been eliminated for purposes of these pro forma financial statements. The
Company anticipates utilizing funds under the revolving credit facility to
fund the $76.0 million (including expenses) purchase price for the
acquisition of the controlling interest in SW Financial. Pro forma
interest costs associated with such borrowing, assuming an interest rate
of 7.0%, amounted to $5.3 million and $4.0 million for the year ended
December 31, 1996, and the nine month period ended September 30, 1997,
respectively, resulting in a net increase of $2.5 million and $1.6
million, respectively.
In connection with the refinancing of the currently outstanding
indebtedness of SW Financial upon consummation of the acquisition of the
SW Financial Controlling Interest, PennCorp anticipates realizing an
after-tax extraordinary charge of approximately $2.7 million related to
the write-off of the SW Financial deferred financing costs.
(7e) As described in Note (5c) above, the PennCorp agreement for the
acquisition of The Fickes and Stone Knightsbridge Interests includes
annual payments based on a rate of interest equal to the IRS's mid-term
rate at the time of the consummation of the acquisition, estimated to be
6.6% on April 15, 1996, on a notional amount of $10.0 million. Interest
costs on a pro forma basis for the year ended
32
<PAGE> 35
December 31, 1996 and the nine month period ended September 30, 1997,
would be $658,000 and $494,000, respectively.
(8) Income taxes -- Amounts shown represent the tax effects of the foregoing
adjustments calculated based upon PennCorp's effective tax rates for the
periods presented.
(9) For the year ended December 31, 1996 and the nine month period ended
September 30, 1997, PennCorp's equity in the undistributed earnings of SW
Financial aggregated $21.0 million and $16.2 million, respectively, which
are eliminated on a pro forma basis.
As a result of the acquisition of the SW Financial Controlling Interest
for an estimated $76.0 million (including expenses), PennCorp will
consolidate the financial position and results of operations of SW
Financial. As noted in (7d) above, PennCorp will utilize borrowings under
its revolving credit facility to finance the acquisition. As a result of
the consolidation, assuming an acquisition date as of September 30, 1997,
PennCorp's investment in SW Financial's common and preferred stock,
aggregating $170.1 million and its interest in $40.0 million of
subordinated indebtedness purchased on August 5, 1997, will be eliminated.
In addition, as noted in (5b) above, costs in excess of net assets
acquired, aggregating $32.4 million, will be realized as a result of the
purchase of the SW Financial Controlling Interest.
(10) Assuming the issuance of the Series II $3.50 Convertible Preferred Stock
on January 1, 1996 pro forma dividends would be $10.1 million, which would
be $6.0 million greater than amounts reported, for the year ended December
31, 1996.
(11) The table on the following page reconciles the historical and pro forma
operating and per share information, including transaction costs and
restructuring charges, to historical and pro forma operating and per share
information, excluding transaction costs and restructuring charges, for
the nine month period ending September 30, 1997:
33
<PAGE> 36
OPERATING AND PER SHARE INFORMATION RECONCILIATION
The reconciliation of historical and pro forma operating and per share
information, including transaction costs and restructuring charges, to
historical and pro forma operating and per share information, excluding
restructuring charges, is as follows:
<TABLE>
<CAPTION>
NINE MONTH PERIOD ENDED SEPTEMBER 30, 1997
------------------------------------------------
HISTORICAL
PENNCORP
HISTORICAL ------------
PENNCORP TRANSACTION COSTS/
------------ RESTRUCTURING AS REPORTED
AS REPORTED CHARGES (NET)
------------ ------------------ ------------
<S> <C> <C> <C>
OPERATING INFORMATION:
-------- --------
Total revenues.................... $504,692 $504,692
-------- --------
Benefit and expenses:
Other benefits and expenses..... 312,538 312,538
Underwriting and other
administrative expenses........ 101,058 (10,110) 90,948
Restructuring charge............ 19,071 (19,071) --
-------- --------
Total benefits and
expenses................... 432,667 403,486
-------- --------
Income before income taxes,
undistributed earnings in
unconsolidated affiliates and
extraordinary charge............ 72,025 101,206
Income tax expense........... 26,783 10,213 36,996
-------- --------
Net income before undistributed
earnings in unconsolidated
affiliates and extraordinary
charge.......................... 45,242 64,210
Undistributed earnings in
unconsolidated
affiliates................. 16,158 16,158
-------- --------
Net income before extraordinary
charge.......................... 61,400 80,368
Preferred stock dividend
requirements............... 14,685 14,685
-------- --------
Net income applicable to common
stock before extraordinary
charge.......................... $ 46,715 $ 65,683
======== ========
PER SHARE INFORMATION:
Net income applicable to common
stock before extraordinary
charge.......................... $ 1.61 $ 2.27
======== ========
Fully diluted net income
applicable to common stock
before extraordinary charge..... $ 1.57 $ 2.07
======== ========
Weighted average primary share
outstanding (in thousands)...... 28,954 28,954
======== ========
Weighted average fully diluted
shares outstanding (in
thousands)...................... 38,161 38,161
======== ========
<CAPTION>
NINE MONTH PERIOD ENDED SEPTEMBER 30, 1997
------------------------------------------------
PRO FORMA B
------------
PRO FORMA B TRANSACTION COSTS/
------------ RESTRUCTURING AS REPORTED
AS REPORTED CHARGES (NET)
------------ ------------------ ------------
<S> <C> <C> <C>
OPERATING INFORMATION:
-------- --------
Total revenues.................... $732,887 $732,887
-------- --------
Benefit and expenses:
Other benefits and expenses..... 471,042 471,042
Underwriting and other
administrative expenses........ 139,714 (10,110) 129,604
Restructuring charge............ 19,071 (19,071) --
-------- --------
Total benefits and
expenses................... 629,827 600,646
-------- --------
Income before income taxes,
undistributed earnings in
unconsolidated affiliates and
extraordinary charge............ 103,060 132,241
Income tax expense........... 38,864 10,213 49,077
-------- --------
Net income before undistributed
earnings in unconsolidated
affiliates and extraordinary
charge.......................... 64,196 83,164
Undistributed earnings in
unconsolidated
affiliates................. -- --
-------- --------
Net income before extraordinary
charge.......................... 64,196 83,164
Preferred stock dividend
requirements............... 14,668 14,668
-------- --------
Net income applicable to common
stock before extraordinary
charge.......................... $ 49,528 $ 68,496
======== ========
PER SHARE INFORMATION:
Net income applicable to common
stock before extraordinary
charge.......................... $ 1.71 $ 2.37
======== ========
Fully diluted net income
applicable to common stock
before extraordinary charge..... $ 1.62 $ 2.11
======== ========
Weighted average primary share
outstanding (in thousands)...... 28,954 28,954
======== ========
Weighted average fully diluted
shares outstanding (in
thousands)...................... 38,507 38,507
======== ========
</TABLE>
34
<PAGE> 37
SUPPLEMENTAL PRO FORMA INFORMATION
The following is a summary of the summary balance sheet adjusting journal
entries, for all proposed acquisitions/transactions as of September 30, 1997:
<TABLE>
<CAPTION>
DEBIT CREDIT
-------- --------
<S> <C> <C>
SW FINANCIAL CONSOLIDATION
Other assets -- costs in excess of net assets acquired (SW
Financial)............................................. $ 32,442 $ --(9)
Long-term debt (SW Financial)............................. 40,000 --(9)
Redeemable preferred stock (SW Financial)................. 36,112 --(9)
Common shareholders' equity (SW Financial)................ 177,566 --(9)
Invested assets -- fixed maturities available for
sale (PennCorp)..................................... -- 40,000(9)
Other assets -- investments in unconsolidated
affiliates (PennCorp)............................... -- 170,120(9)
Long-term debt (PennCorp)............................ -- 76,000(9)
-------- --------
$286,120 $286,120
======== ========
ACQUISITION OF THE FICKES AND STONE KNIGHTSBRIDGE
INTERESTS
Other assets -- costs in excess of net assets acquired
(Knightsbridge Management LLC)......................... $ 10,000 $ --(5c)
Long-term debt (PennCorp)............................ -- 10,000(5c)
-------- --------
$ 10,000 $ 10,000
======== ========
</TABLE>
35
<PAGE> 38
WEIGHTED AVERAGE COMMON SHARES USED IN COMPUTING EARNINGS PER SHARE
(FOR THE YEAR ENDED DECEMBER 31, 1996)
<TABLE>
<CAPTION>
PRIMARY FULLY-DILUTED
SHARES SHARES
------- --------------
(IN THOUSANDS)
<S> <C> <C>
Shares outstanding at the beginning of the period........... 22,880 22,880
Incremental shares applicable to:
Treasury shares/Options/Warrants.......................... 1,138 1,138
$3.375 Convertible Preferred Stock (2,300,000 shares *
($50.00/$22.60))....................................... -- 5,088
$3.50 Series II Convertible Preferred Stock (2,875,000
shares * ($50.00/$34.90)).............................. -- 1,679
Stock issuance on March 6, 1996........................... 4,232 4,232
UC Life acquisition convertible debentures (483,839
shares)................................................ 212 212
------ ------
28,462 35,229
Acquisition of The Fickes and Stone Knightsbridge
Interests.............................................. -- 346
------ ------
Pro forma weighted average shares outstanding for the year
ended December 31, 1996................................... 28,462 35,575
====== ======
</TABLE>
WEIGHTED AVERAGE COMMON SHARES USED IN COMPUTING EARNINGS PER SHARE
(FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1997)
<TABLE>
<CAPTION>
PRIMARY FULLY-DILUTED
SHARES SHARES
------- --------------
(IN THOUSANDS)
<S> <C> <C>
Shares outstanding at the beginning of the period........... 28,648 28,648
Incremental shares applicable to:
Treasury shares/Options/Warrants.......................... 306 306
$3.375 Convertible Preferred Stock (2,300,000 shares *
($50.00/$22.60))....................................... -- 5,088
$3.50 Series II Convertible Preferred Stock (2,875,000
shares * ($50.00/$34.90)).............................. -- 4,119
------ ------
28,954 38,161
Acquisition of The Fickes and Stone Knightsbridge
Interests.............................................. -- 346
------ ------
Pro forma weighted average shares outstanding for the nine
month period ended September 30, 1997..................... 28,954 38,507
====== ======
</TABLE>
36
<PAGE> 39
REPORT OF THE COMPENSATION COMMITTEE
OF THE BOARD OF DIRECTORS
BACKGROUND
During 1996, Messrs. Stone and Fickes, the Company's two senior officers,
began discussions with the PennCorp Board on a means of consolidating their
outside business interests, including the Knightsbridge Fund, under PennCorp.
Subsequently, Messrs. Stone and Fickes, the members of the Knightsbridge
Committee and the Compensation Committee of the PennCorp Board of Directors (the
"Compensation Committee") developed a plan to enable PennCorp to manage the
Knightsbridge Fund and to provide Messrs. Stone and Fickes with a compensation
program that offers them compensation opportunities with economic interests
aligned with stockholders generally and that provides incentives for each to
make a long-term, full-time commitment to PennCorp. One of the components of the
Knightsbridge restructuring plan was the adoption of compensation arrangements
pursuant to which Messrs. Stone and Fickes have entered into five-year
employment agreements with PennCorp.
1996 SENIOR EXECUTIVE COMPENSATION
Each of Messrs. Stone and Fickes were compensated in 1996 pursuant to the
terms of their employment agreements. The continuation of those employment
agreements is contingent upon the consummation of the purchase by PennCorp of
The Fickes and Stone Knightsbridge Interests. The employment agreements contain
a three-part compensation program consisting of base salary, an annual incentive
bonus opportunity and stock option awards.
Base Salary. Effective as of April 15, 1996, each of Messrs. Stone and
Fickes began receiving an annual base salary of $750,000, which represents
approximately the 67th percentile for the average of the 1995 salaries paid to
the top two executives at the comparison companies selected by the Compensation
Committee's compensation consultant. The Compensation Committee selected the
67th percentile based on its belief that Messrs. Stone and Fickes are critical
to the Company's continuing success and should receive above average
compensation. The Compensation Committee will review Messrs. Stone's and Fickes'
annual base salaries each year to determine whether an increase is appropriate
based on competitive industry practices.
Annual Bonus Opportunity. Messrs. Stone and Fickes participate in the
Company's 1996 Senior Executive Annual Incentive Award Plan (the "Incentive
Plan"), pursuant to which each is eligible to receive an annual cash bonus if
the Company meets or exceeds pre-established performance goals, which for 1996
were based on a targeted growth rate in annual compounded earnings per share
(calculated on a fully-diluted basis without regard to investment gains or
losses) ("EPS"). The target bonus amount for a 1996 EPS increase of 15% over
1995 EPS was set at $800,000, which reflected the 67th percentile for the
average of the 1995 bonuses for the two most senior executives at the comparison
companies selected by the Compensation Committee's compensation consultant.
Based on 1996 results, each of Messrs. Stone and Fickes were awarded $860,000
under the Incentive Plan.
Stock Option Awards. In connection with their new employment agreements,
each of Messrs. Stone and Fickes received a grant of options to purchase up to
559,000 shares of Common Stock under the Stock Plan. Of those options, (i)
250,000 options have an exercise price of $28.875 per share (fair market value
based on the closing price of the Common Stock on the New York Stock Exchange
("NYSE") on April 15, 1996, the effective date of their employment agreements),
(ii) 103,000 options have an exercise price of $31.762 per share (110% of fair
market value as of April 15, 1996), (iii) 103,000 options have an exercise price
of $34.939 per share (121% of fair market value as of April 15, 1996) and (iv)
103,000 options have an exercise price of $38.404 per share (133% of fair market
value as of April 15, 1996). All such options vest in four equal annual
installments on each April 15, beginning April 15, 1997, and expire on April 15,
2001. William M. Mercer, Incorporated, the Company's compensation consultant,
reported to the Compensation Committee that these awards each had an aggregate
grant date present value (using a Black-Scholes valuation model) of $4.7
million, which represented the 75th percentile for the average grant date
present value of stock option awards
37
<PAGE> 40
made in 1995 to the two most senior executives of the comparison companies
evaluated by the compensation consultant. The Compensation Committee's decision
to recommend options at the 75th percentile reflected the Committee's focus on
developing a compensation program that gives more weight to long-term
performance than to short-term success.
Compensation Philosophy. The employment agreements for Messrs. Stone and
Fickes reflect the Compensation Committee's philosophy to identify with the
interests of stockholders and promote and support the Company's entrepreneurial
and acquisition-oriented character by providing the opportunity for senior
management to earn significant compensation if significant value is created for
stockholders. Because of the Company's focus on profitable growth, the
Compensation Committee believes that executive officers should share in the
risks and rewards experienced by, and therefore share the perspectives of,
stockholders. Accordingly, the members of the Compensation Committee believe
that those executives most able to affect changes in stockholder value should
receive compensation weighted toward incentives, such as stock options, that
offer the opportunity for significant economic gain based on the performance of
the Company's stock over a several year horizon, balanced with appropriate base
salary and annual bonus opportunities, which reward short-term performance.
Section 162(m). It is the Company's policy to take all reasonable steps to
obtain the maximum deduction available for compensation paid to its executives.
To qualify for the exemption from the limitation on the deductibility of certain
executive compensation contained in Section 162(m) of the Internal Revenue Code
of 1986, as amended, the Company solicited and obtained stockholder approval at
the 1996 Annual Meeting for the adoption of the Stock Plan and the award to Mr.
Fickes of a warrant to purchase 60,000 shares of Common Stock.
Compensation Committee:
Kenneth Roman, Chairman
Bruce W. Schnitzer
David C. Smith
Allan D. Greenberg*
* Mr. Greenberg recused himself from proceedings related to Messrs. Stone's and
Fickes' employment agreements and the Knightsbridge restructuring plan.
38
<PAGE> 41
STOCK PERFORMANCE GRAPH
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) S&P 500 S&P LIFE PENNCORP
<S> <C> <C> <C>
12/31/92 104.79 114.27 115.00
12/31/93 115.26 115.70 131.11
12/31/94 116.50 95.53 87.91
12/31/95 160.51 137.25 198.10
12/31/96 197.31 167.92 243.23
</TABLE>
The above graph compares the performance of the Company's Common Stock with
that of the S&P 500 Composite Index and the S&P Life Insurance Index over a
measurement period beginning on October 30, 1992 (the date the Company's Common
Stock began trading on the NYSE). Total stockholder return is calculated using
the change in the stock price or index levels from the beginning of the
measurement period, adjusted for the reinvestment of dividends on a quarterly
basis. The comparison of total return on investment assumes that $100 was
invested on October 30, 1992 in each of the Company, the S&P 500 Composite
Index, and the S&P Life Insurance Index, with the latter two investments
weighted on the basis of market capitalization.
39
<PAGE> 42
EXECUTIVE COMPENSATION
SUMMARY OF EXECUTIVE COMPENSATION
The following table sets forth, for the fiscal years ended December 31,
1994, 1995 and 1996, the cash compensation as well as certain other compensation
paid to or earned by the Company's Chief Executive Officer and the four other
most highly compensated executive officers of the Company (collectively, the
"Named Executive Officers") for those years.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
ANNUAL COMPENSATION -------------------------
-------------------------- RESTRICTED SECURITIES ALL OTHER
NAME AND PRINCIPAL SALARY BONUS STOCK UNDERLYING COMPENSATION
POSITION YEAR ($) ($) AWARDS($)(6) OPTIONS(#) ($)(8)
------------------ ---- ------- --------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
David J. Stone -- 1996 687,495 860,000 -- 559,000 11,869
Chairman of the Board 1995 408,340 1,150,000 -- -- 11,784
and Chief Executive 1994 500,000 100,000 -- -- 11,802
Officer(1)
Steven W. Fickes -- 1996 687,495 860,000 -- 559,000 11,869
President and Chief 1995 408,340 1,000,000 -- 60,000 11,784
Financial Officer(2) 1994 500,000 150,000 -- -- 11,802
Scott D. Silverman -- 1996 187,500 150,000 -- 50,000 55,725
Senior Vice President, 1995 118,750 230,000 -- -- 9,133
General Counsel and 1994 115,000 45,000 16,250(7) 5,000 8,007
Secretary(3)
Michael J. Prager -- 1996 187,500 150,000 -- 50,000 11,869
Senior Vice President 1995 150,000 180,000 -- -- 265,153
and Senior Financial Officer(4)
James P. McDermott -- 1996 187,500 150,000 -- 50,000 11,869
Senior Vice President(5) 1995 150,000 150,000 -- -- 11,784
</TABLE>
- ---------------
(1) All compensation shown in the table for 1996 was paid pursuant to Mr.
Stone's Employment Agreement. See "-- Employment Agreements".
(2) All compensation shown in the table for 1996 was paid pursuant to Mr.
Fickes' Employment Agreement. See "-- Employment Agreements".
(3) Mr. Silverman became an executive officer of the Company in January 1994.
(4) Mr. Prager became an executive officer of the Company in September 1995. The
table above reflects all of Mr. Prager's 1995 compensation.
(5) Mr. McDermott became an executive officer of the Company in September 1995.
The table above reflects all of Mr. McDermott's 1995 compensation.
(6) The only Named Executive Officers who held restricted stock at the end of
1996 were Messrs. Silverman, McDermott and Prager, who each held 250 shares
with a value, as of December 31, 1996, of $9,000. Those shares vested on
April 1, 1997.
(7) Represents the fair market value, based on the closing price of the Common
Stock on the NYSE on March 31, 1994 (the last trading day immediately prior
to the date of grant), of 1,000 shares of Common Stock granted to Mr.
Silverman as part of his bonus for 1993.
(8) Except as noted below, represents (a) matching and (b) profit sharing
contributions made to the Company's 401(k) retirement and profit sharing
plan for 1996. (Mr. Stone: $4,750 and $7,119, respectively; Mr. Fickes:
$4,750 and $7,119, respectively; Mr. Silverman: $2,816 and $7,119,
respectively; Mr. Prager: $4,750 and $7,119, respectively; Mr. McDermott
$4,750 and $7,119, respectively.) In the case of Mr. Prager, the amount
reflected for 1995 also includes reimbursement of relocation expenses of
$253,369. In the case of Mr. Silverman, the amount reflected for 1996 also
includes reimbursement of relocation expenses of $45,790.
40
<PAGE> 43
The following table shows options and warrants granted to the Named
Executive Officers during the fiscal year ended December 31, 1996.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------------------------------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE GRANT DATE
OPTIONS GRANTED EMPLOYEES PRICE EXPIRATION PRESENT VALUE
NAME (#) IN FISCAL YEAR ($/SH) DATE ($)(3)
---- --------------- -------------- -------- ---------- -------------
<S> <C> <C> <C> <C> <C>
David J. Stone(1).............. 250,000 17.88 28.875 04/15/01 2,463,750(4)
103,000 7.37 31.762 04/15/01 906,091(4)
103,000 7.37 34.939 04/15/01 800,516(4)
103,000 7.37 38.404 04/15/01 700,297(4)
Steven W. Fickes(1)............ 250,000 17.88 28.875 04/15/01 2,463,750(4)
103,000 7.37 31.762 04/15/01 906,091(4)
103,000 7.37 34.939 04/15/01 800,516(4)
103,000 7.37 38.404 04/15/01 700,297(4)
Scott D. Silverman(2).......... 25,000 1.79 30.000 07/12/01 254,775(5)
8,333 0.596 31.762 07/12/01 79,297(5)
8,333 0.596 34.939 07/12/01 70,114(5)
8,334 0.596 38.404 07/12/01 61,372(5)
Michael J. Prager(2)........... 25,000 1.79 30.000 07/12/01 254,775(5)
8,333 0.596 31.762 07/12/01 79,297(5)
8,333 0.596 34.939 07/12/01 70,114(5)
8,334 0.596 38.404 07/12/01 61,372(5)
James P. McDermott(2).......... 25,000 1.79 30.000 07/12/01 254,775(5)
8,333 0.596 31.762 07/12/01 79,297(5)
8,333 0.596 34.939 07/12/01 70,114(5)
8,334 0.596 38.404 07/12/01 61,372(5)
</TABLE>
- ---------------
(1) Represents option grants to Messrs. Stone and Fickes under the Stock Plan
pursuant to the terms of their Employment Agreements. Of these options, (i)
250,000 options have an exercise price of $28.875 per share (fair market
value based on the closing price of the Common Stock on the NYSE on April
15, 1996, the effective date of Messrs. Stone's and Fickes' Employment
Agreements), (ii) 103,000 options have an exercise price of $31.762 per
share (110% of fair market value as of April 15, 1996), (iii) 103,000
options have an exercise price of $34.939 per share (121% of fair market
value as of April 15, 1996), and (iv) 103,000 options have an exercise price
of $38.404 per share (133% of fair market value as of April 15, 1996).
Twenty-five percent of each option grant shall vest on each April 15th,
commencing April 15, 1997 and all such options, unless previously exercised,
will expire on April 15, 2001. The options automatically vest upon a "change
of control" (as defined). In addition, these option grants will be rescinded
if stockholders do not approve the purchase of The Fickes and Stone
Knightsbridge Interests at the Annual Meeting pursuant to their terms. For a
discussion of the other terms of the options, see "-- Employment
Agreements".
(2) Represents option grants under the terms of the Stock Plan. Of these
options, (i) 25,000 options have an exercise price of $30 per share (fair
market value based on the closing price of the Common Stock on the NYSE on
July 12, 1996, the date of grant), (ii) 8,333 options have an exercise price
of $31.762 per share (106% of the fair market value as of July 12, 1996),
(iii) 8,333 options have an exercise price of $34.939 per share (116% of
fair market value as of July 12, 1996), and (iv) 8,334 options have an
exercise price of $38.404 per share (128% of fair market value as of July
12, 1996). Twenty-five percent of each option grant shall vest on each July
12th, commencing July 12, 1997 and all such options, unless previously
exercised, will expire on July 12, 2001. The options automatically vest upon
a "change of control." In the event of the death, or termination of a
participant's employment by the Company other than for "cause", all
unexercisable stock options held as of the date of the death or termination
of employment shall become immediately exercisable and all exercisable
options shall remain exercisable until: (i) ninety-days following the
participant's death or termination of employment, or (ii) the date the
option expires, whichever is earlier. In the event of the termination of a
participant's employment for "cause", all exercisable and unexercisable
stock options shall be forfeited.
(3) Based on the Black-Scholes option pricing model adapted for use in valuing
stock options. The actual value, if any, an executive may realize will
depend on the excess of the stock price over the exercise price on the date
the option is exercised, so that there is no assurance the value realized by
an executive will be at or near the value estimated by the Black-Scholes
model. Assumptions used in calculating grant date present value under the
Black-Scholes model include stock price volatility at grant date, risk-free
rate of return
41
<PAGE> 44
at grant date, annual dividend yield at grant date, option term from grant
date and closing stock price at grant date. See Notes 4 and 5 below.
(4) The following assumptions were used to calculate the Grant Date Present
Value using the Black-Scholes option pricing model: stock price volatility
at grant date of 30.12%; risk-free rate of return at grant date of 5%;
annual dividend yield of 0.64%; term of five years from grant date; and
closing stock price at grant date of $28.875 per share.
(5) The following assumptions were used to calculate the Grant Date Present
Value using the Black-Scholes option pricing model: stock price volatility
at grant date of 29.14%; risk-free rate of return at grant date of 5.29%;
annual dividend yield of 0.64%; term of five years from grant date; and
closing stock price at grant date of $30 per share.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES (1)
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT
ACQUIRED VALUE YEAR-END (#) FISCAL YEAR-END ($)(3)
ON EXERCISE REALIZED --------------------------- ---------------------------
(#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
David J. Stone............. -- -- 225,000 559,000 4,477,500 2,327,047
Steven W. Fickes........... -- -- 240,000 604,000 4,777,500 3,227,047
Scott D. Silverman......... -- -- 2,500 60,000 76,500 400,682
Michael J. Prager.......... -- -- 12,500 50,000 382,500 194,157
James P. McDermott......... 1,683 31,657(2) 6,459 54,358 134,864 286,459
</TABLE>
- ---------------
(1) None of the Named Executive Officers exercised any stock options or warrants
during 1996 other than Mr. McDermott.
(2) Based on the average of the quoted high and low sale prices of the Common
Stock ($33.93 per share) on December 30, 1996, as reported by the NYSE.
(3) Based on the closing price of the Common Stock of $36.00 per share on
December 31, 1996, as reported by the NYSE.
EMPLOYMENT AGREEMENTS
In June 1996, but effective as of April 15, 1996, each of Messrs. Stone and
Fickes entered into a five-year employment agreement with the Company. The
continuation of these employment agreements is contingent upon the consummation
of the acquisition of The Fickes and Stone Knightsbridge Interests. See "CERTAIN
TRANSACTIONS -- The Knightsbridge Restructuring Plan and Related Litigation
Settlement." These agreements reflect a three-part compensation program:
Base Salary -- $750,000 per year (subject to annual review for possible
increase).
Annual Incentive Bonus -- Base minimum annual target bonus opportunity of
$800,000 per year if the Company meets or exceeds pre-established performance
goals, which for 1996 was based on a targeted growth rate in annual compounded
earnings per share of 15%.
Initial Stock Option Awards
(i) 250,000 options with an exercise price of $28.875 per share;
(ii) 103,000 options with an exercise price of $31.762 per share;
(iii) 103,000 options with an exercise price of $34.939 per share; and
(iv) 103,000 options with an exercise price of $38.404 per share.
All the initial options granted in accordance with the employment agreements
will vest and become exercisable, except as otherwise described in this
paragraph, in four equal installments on each April 15, commencing April 15,
1997, and will expire on April 15, 2001. In the event of the death or disability
(as defined) of the executive, all unexercisable options immediately will vest
and become exercisable and all the vested and unexercisable options held by the
executive on the date of death or termination of employment will remain
exercisable until the end of the option term or the end of the one-year period
following such death or the termination of employment, whichever is earlier. In
the event of the termination of the executive's
42
<PAGE> 45
employment by the Company without "cause", by the executive for "good reason" or
by the Company or the executive following a "change of control" (in each case,
as defined), all unexercisable options immediately will vest and become
exercisable and all vested and unexercisable options held by the executive on
the date of the termination of employment will remain exercisable until the end
of the option term. In the event of the termination of employment by the Company
for "cause", the executive will forfeit all previously unexercised and
unexercisable stock options granted pursuant to the employment agreement. In the
event of a termination of employment by the executive other than for "good
reason", all vested and exercisable options held by the executive on the date of
such termination of employment will remain exercisable until the earlier of the
end of the option term or the end of the six-month period following the
termination of employment. The foregoing discussion addresses the consequences
of termination of employment with respect only to the options initially granted
under the employment agreement. In addition, due to a clerical error in
calculating the initial option exercise price as of April 15, 1996, the
foregoing options were incorrectly reported as having option exercise prices of
$29.50, $32.45, $35.695, and $39.325, respectively.
The employment agreements for Messrs. Stone and Fickes also provide that if
employment is terminated due to death, the executive's estate will receive any
annual salary or similar amounts (but not bonus) earned but not paid prior to
the date of death, plus any additional death benefits provided under the
Company's other benefit plans and programs. In the event of the termination of
employment due to disability, in addition to any other benefits provided under
the Company's otherwise applicable plans and programs and the right to continue
to participate in the Company's employee benefit plans until reaching age 65,
the executive will receive (i) any salary or similar amounts (not bonus) earned
but not paid prior to the date of termination of employment, plus (ii) in
periodic installments until the last day of the month in which the employee
reaches age 65, an annual amount equal to 60% of the executive's base salary in
effect on the date of the termination of employment, less the amount of any
disability benefits (other than those attributable to the executive's
contributions) provided under the Company's disability plan, plus (iii) a pro
rated bonus for the year in which termination of employment occurs based on an
amount equal to the product of the average percentage of the executive's base
salary paid to the executive as an incentive bonus for the two calendar years
immediately preceding the termination of employment. In the event of termination
of employment without cause or for good reason, in addition to continuing to
participate in the employee benefit plans of the Company until the earlier of
the end of the period for which payments are made under the agreement or the
date the executive receives equivalent coverage and benefits from a subsequent
employer, the executive will receive (i) any salary or similar amounts (but not
bonus) earned but not paid prior to the date of termination of employment, plus
(ii) a lump sum payment equal to the executive's base salary, at the annualized
rate in effect on the date of termination of employment, for the longer of the
end of the term of the employment agreement or 24 months (unless termination of
employment follows a change in control, such amount to be discounted using a
discount rate based on the applicable long-term federal rate published by the
Internal Revenue Service (the "IRS") for the month in which termination of
employment occurs), plus (iii) an amount equal to the same percentage of the
executive's base salary as the average of the annual incentive bonuses paid to
the executive for the two calendar years immediately preceding the date of
termination of employment was as a percentage of base salary in each such year.
In the event of a termination of employment following a change of control, the
executive will receive the same benefits as for termination without cause, or if
the executive resigns without good reason, the executive will be entitled to
receive only base salary and similar amounts (but not bonus) earned but not paid
prior to the termination of employment.
The employment agreements also provide that Messrs. Stone and Fickes will
not engage in any "competitive activity" (as defined) during the term of the
agreements or, in the event of a voluntary termination of employment by the
executive, for a six-month period following the termination of employment. In
addition, during the term of the agreements or, in the event of a voluntary
termination of employment by the executive, for a one-year period following the
termination of employment, the executive will not, directly or indirectly,
solicit, negotiate with or enter into discussions with the shareholders or
representatives of any business with which the Company has engaged in
discussions to acquire, merge, or enter into a joint venture during the 12-month
period immediately preceding the date of the termination of employment.
Moreover, the executive will agree not to solicit (i) the Company's employees
for 18 months following the termination of
43
<PAGE> 46
employment and (ii) the Company's agents, brokers or policyholders for 36 months
following the termination of employment.
Upon approval by the Company's shareholders of the purchase by the Company
of The Fickes and Stone Knightsbridge Interests and the SW Financial Controlling
Interest, Messrs. Stone and Fickes have agreed to modify their employment
agreements to provide that they shall not directly or indirectly engage in any
Fund Competitive Activity (as that term will be defined in the modified
employment agreement) during (i) the term of employment, (ii) in the event of a
voluntary termination of employment prior to the date on which the aggregate
Investments (as defined in the Knightsbridge Fund Partnership Agreement) made by
the Knightsbridge Fund in Portfolio Companies (as defined in the Knightsbridge
Fund Partnership Agreement) equals or exceeds $92 million (the Fully Invested
Date"), the one-year period following the date of the executive's termination of
employment, or (iii) in the event of a voluntary termination of employment on or
after the Fully Invested Date, the nine-month period following the Fully
Invested Date or the six-month period following the date of the executive's
termination of employment, whichever is longer.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee consists of Messrs. Roman, Schnitzer, Smith and
Greenberg. Mr. Greenberg became a member of the Compensation Committee on
September 21, 1995. In 1996, ADG Insurance Advisors, Inc., of which Mr.
Greenberg is Chairman, earned aggregate consulting fees, including reimbursement
of actual out-of-pocket expenses, of $250,000 for services in connection with
the Company's acquisition, reinsurance and other activities. Mr. Greenberg
formerly owned a 5% interest in Knightsbridge Capital. Messrs. Stone and Fickes
have purchased Mr. Greenberg's interest in Knightsbridge Capital in connection
with the restructuring of the relationships between the Company and the
Knightsbridge Fund.
Bruce W. Schnitzer, a director of the Company, is a managing member of Wand
Partners L.L.C. ("Wand Partners"), a private investment firm. Two limited
partnerships controlled by Wand Partners invested an aggregate of $28,000,000 in
the common stock of ACO Brokerage Holdings Corporation as part of the Acordia
transaction. Wand Partners received aggregate commitment and financial advisory
fees of approximately $2,000,000 from ACO Brokerage Holdings Corporation in
connection with that transaction. In addition, the Company is a limited partner
in a partnership controlled by Wand Partners (the "Wand Fund"), and invested
(through one of its subsidiaries) $2,000,000 in ACO Brokerage Holdings
Corporation through the Wand Fund. The general partner of the Wand Fund is
entitled to receive 20% of the profits earned by its limited partners, including
the Company, on their investment in ACO Brokerage Holdings Corporation, after
they have been repaid their capital contributions to the partnership, assuming a
9% preferred rate of return has been achieved on their capital. The Wand Fund
has agreed to offer the Company's $2,000,000 limited partnership interest in ACO
Brokerage Holdings Corporation to its other limited partners, so that the
Company's common stock investment in ACO Brokerage Holdings Corporation will be
limited to its $5,000,000 co-investment. In the event that the Company
consummates the acquisition of The Fickes and Stone Knightsbridge Interests, the
Company will assume a "promote" agreement between Messrs. Stone and Fickes and
Wand Partners pursuant to which Wand Partners will be entitled to receive 20% of
the profits earned with respect to $2,000,000 of the $5,000,000 co-investment.
For further information regarding the Acordia Transaction, see "-- The
PennCorp/Knightsbridge Relationship -- Transactions Involving the Knightsbridge
Fund and PennCorp -- The Acordia Transaction."
As of the date hereof, the Company has invested a total of $6,800,000 in
transactions sponsored by Wand Partners (including the $2,000,000 investment in
ACO Brokerage Holdings Corporation). The Company has committed to invest up to
an additional $13,000,000 in future transactions sponsored by Wand Partners. In
addition, the Company has purchased approximately $7,500,000 in limited
partnership interests in other limited partnerships controlled by Wand Partners.
The Company accrued fees of approximately $163,645 to Wand Partners for 1996 and
$150,447 for the period from January 1, 1997 through August 28, 1997. As of
August 29, 1997, the Company's annual commitment fee obligation to Wand Partners
was approximately $396,000 per annum, subject to offset under certain
circumstances.
44
<PAGE> 47
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
Except as otherwise noted below, the following table sets forth, as of
November 1, 1997, the ownership of the outstanding shares of Common Stock held
by persons known by the Company to own beneficially more than 5% of the
outstanding shares of Common Stock, by all directors of the Company, by the
Named Executive Officers, and by the executive officers and directors of the
Company as a group, and the percentage of the Common Stock represented thereby.
Except as otherwise noted below, the Company believes that each director, Named
Executive Officer, executive officer and over 5% stockholder shown below has
sole voting and sole investment power with respect to all shares beneficially
owned by them.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS
------------------------------------ -------------------- ----------------
<S> <C> <C>
The Mutuelles AXA(1)
100-101 Terrasse Boieldieu............ 3,873,149 13.8
92042 Paris La Defense France
Merrill Lynch & Co., Inc.(2)
World Financial Center, North Tower... 2,132,600 7.6
250 Vesey Street
New York, New York 10281
</TABLE>
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS
------------------------ -------------------- ----------------
<S> <C> <C>
Steven W. Fickes(3)..................... 564,444 2.0
Allan D. Greenberg(4)................... 403,753 1.4
William M. McCormick(5)................. 858,129 3.1
James P. McDermott(6)................... 41,666 *
Thomas A. Player(7)..................... 9,128 *
Michael J. Prager(8).................... 47,559 *
Kenneth Roman(9)........................ 10,460 *
Bruce W. Schnitzer(10).................. 45,203 *
Scott D. Silverman(11).................. 42,551 *
Maurice W. Slayton(12).................. 7,383 *
David C. Smith(13)...................... 10,460 *
David J. Stone(14)...................... 1,139,420 4.1
All directors and executive officers as
a group(15)........................... 3,225,280 11.5
</TABLE>
- ------------------------
* Represents less than 1%.
(1) The Mutuelles AXA (consisting of AXA Assurances I.A.R.D. Mutuelle; AXA
Assurances Vie Mutuelle; Alpha Assurances Vie Mutuelle; and AXA Courtage
Assurance Mutuelle (formerly known as Uni Europe Assurance Mutuelle), as a
group) and AXA-UAP parent holding company for AXA Equity & Law PLC (U.K.).
Each of the Mutuelles AXA and AXA-UAP, disclaim beneficial ownership of the
shares shown above. The principal business office of (i) Alpha Assurances
Vie Mutuelle is 100- 101 Terrasse Boieldieu 92042 Paris La Defense France;
(ii) AXA Assurances I.A.R.D. Mutuelle and AXA Assurances Vie Mutuelle is
21, rue de Chateaudun 75009 Paris France; (iii) AXA Courtage Assurance
Mutuelle is 26, rue Louis le Grand 75002 Paris France; and (iv) AXA-UAP is
23, avenue Matignon 75008 Paris France. The Equitable Companies
Incorporated is a parent holding company for The Equitable Life Assurance
Society of the United States, an insurance company, a registered investment
adviser and broker-dealer, Alliance Capital Management L.P., a registered
investment adviser, Donaldson, Lufkin & Jenrette Securities Corporation, a
registered investment adviser and broker-dealer and Wood, Struthers &
Winthrop Management Corporation, a registered investment adviser. The
principal business office of The Equitable Companies Incorporated is 787
Seventh Avenue, New York, New York 10019. Each of the foregoing
subsidiaries of The Equitable Companies Incorporated operates under
independent management and makes independent decisions. As of September 30,
1997, based on information supplied to the Company by the Mutuelles AXA,
AXA-UAP and The Equitable Companies Incorporated, (i) AXA Equity and Law
PLC had sole voting and dispositive power over 150,700 shares of Common
Stock; (ii) The Equitable Life Assurance Society of the United States had
sole voting power over 21,000 shares of Common Stock, sole dispositive
power over 75,300 shares and shared power to vote 54,300 shares of Common
Stock (iii) Alliance Capital Management, L.P. had sole voting power over
3,087,508 shares of Common Stock, shared power to vote and dispose of 2,207
shares and sole dispositive power over 3,486,080 shares of Common Stock
45
<PAGE> 48
including 114,471 shares of Common Stock issuable upon the conversion of
the Company's $3.375 Convertible Preferred Stock; (iv) Donaldson, Lufkin &
Jenrette Securities Corporation had sole voting and dispositive power over
22,120 shares of Common Stock and shared dispositive power over 62,442
shares, including 22,562 shares issuable upon the conversion of the
Company's $3.375 Convertible Preferred Stock; and (v) Wood, Struthers &
Winthrop Management Corporation had sole voting power over 37,000 shares of
Common Stock and sole dispositive power over 71,000 shares of Common Stock.
The shares held by Alliance Capital Management, L.P. and Wood, Struthers &
Winthrop Management Corp. were acquired solely for investment purposes on
behalf of client discretionary investment advisory accounts. The shares
held by AXA Equity & Law PLC, The Equitable Life Assurance Society of the
United States and Donaldson, Lufkin & Jenrette Securities Corporation were
acquired solely for investment purposes.
(2) The following information was provided by Merrill Lynch Asset Management
L.P., d/b/a Merrill Lynch Asset Management ("MLAM"): MLAM is an investment
advisor registered under the Investment Advisors Act of 1940. The position
reported in the table above is aggregately held by certain investment
companies and private accounts for which MLAM acts as an investment
advisor. MLAM is a wholly owned subsidiary of Merrill Lynch & Co., Inc.
("ML&Co."). As a result of such affiliation, ML&Co. may be deemed to share
with MLAM investment discretion and voting authority with respect to such
holdings. As of September 30, 1997, based on information provided by
ML&Co., (i) ML&Co. may be deemed to share voting and dispositive power over
2,132,600 shares of Common Stock and (ii) MLAM has sole voting power and
shared dispositive power over 2,132,600 shares of Common Stock. The
principal business office of ML&Co. is World Financial Center, North Tower,
250 Vesey Street, New York, New York 10281, and the principal business
office of MLAM is 800 Scudders Mill Road, Plainsboro, New Jersey 08536.
(3) Consists of (i) 202,226 shares of Common Stock owned of record by Mr.
Fickes, (ii) 178,634 shares of restricted Common Stock, which replaces
presently exercisable Management Warrants to purchase 285,000 shares of
Common Stock, (iii) 139,750 shares of Common Stock that may be purchased
pursuant to presently exercisable stock options awarded to Mr. Fickes
pursuant to his Employment Agreement effective April 15, 1996, (the
continuation of the Employment Agreement is contingent upon the
consummation of the acquisition of The Fickes and Stone Knightsbridge
Interests), (iv) 43,106 shares of Common Stock held of record by Mr.
Fickes' wife and (v) 728 shares of Common Stock held of record by Mr.
Fickes' children. Mr. Fickes disclaims beneficial ownership of Common Stock
not held of record by him.
(4) Consists of (i) 168,753 shares of Common Stock owned of record by Mr.
Greenberg, (ii) 225,000 shares of Common Stock that may be purchased
pursuant to a presently exercisable Management Warrant and (iii) 10,000
shares of Common Stock owned of record by a trust for the benefit of Mr.
Greenberg's minor children over which Mr. Greenberg's wife has sole voting
power. Mr. Greenberg disclaims beneficial ownership of Common Stock not
held of record by him.
(5) Consists of (i) 570,760 shares of Common Stock subject to a presently
exercisable warrant held by a living trust of which Mr. McCormick is the
sole beneficiary and trustee (the "McCormick Living Trust"), (ii) 225,000
shares of Common Stock that may be purchased pursuant to a presently
exercisable Management Warrant, (iii) 10,000 shares of Common Stock owned
by Mr. McCormick, (iv) 31,967 shares of Common Stock held by the McCormick
Living Trust, (v) 5,550 shares of Common Stock held of record by Mr.
McCormick's minor children over which Mr. McCormick has voting power, (vi)
10,000 shares of Common Stock owned of record by an irrevocable trust for
the benefit of Mr. McCormick's minor children and over which Mr. McCormick
has no voting or investment control and (vii) 4,852 shares of Common Stock
owned by Mr. McCormick's wife. Other than the shares of Common Stock held
by Mr. McCormick's minor children over which Mr. McCormick has voting
control and the warrants and shares of Common Stock owned by Mr. McCormick
and by the McCormick Living Trust, Mr. McCormick disclaims beneficial
ownership of Common Stock not held of record by him.
(6) Consists of (i) 21,933 shares of Common Stock owned of record by Mr.
McDermott, (ii) 7,233 shares of restricted Common Stock, which replaces
exercisable employee stock options awarded to Mr. McDermott on November 17,
1992, and June 14, 1993 and (iii) 12,500 shares of Common Stock subject to
a presently exercisable stock option.
(7) Consists of (i) 6,128 shares of Common Stock owned of record by Mr. Player
and (ii) 3,000 shares of Common Stock that may be purchased pursuant to a
presently exercisable Management Warrant.
(8) Consists of (i) 22,050 shares of Common Stock owned of record by Mr.
Prager, (ii) 13,009 shares of restricted Common Stock, which replaces an
exercisable employee stock option awarded to Mr. Prager on April 3, 1992
and (iii) 12,500 shares of Common Stock subject to a presently exercisable
stock option.
(9) Consists of (i) 7,460 shares of Common Stock owned of record by Mr. Roman
and (ii) 3,000 shares of Common Stock that may be purchased pursuant to a
presently exercisable Management Warrant.
(10) Consists of (i) 23,497 shares of Common Stock owned of record by Mr.
Schnitzer, (ii) 18,706 shares owned of record by Magical Corporation, of
which Mr. Schnitzer is the sole owner and (iii) 3,000 shares of Common
Stock that may be purchased pursuant to a presently exercisable Management
Warrant.
(11) Consists of (i) 23,500 shares of Common Stock owned of record by Mr.
Silverman, (ii) 6,551 shares of restricted Common Stock, which replaces
employee stock options awarded to Mr. Silverman in 1993 and 1994 and (iii)
12,500 shares of Common Stock subject to a presently exercisable stock
option.
(12) Consists of (i) 4,383 shares of Common Stock owned of record by Mr. Slayton
and (ii) 3,000 shares of Common Stock that may be purchased pursuant to a
presently exercisable Management Warrant.
(13) Consists of 7,460 shares of Common Stock owned of record by Mr. Smith and
(ii) 3,000 shares of Common Stock that may be purchased pursuant to a
presently exercisable Management Warrant.
46
<PAGE> 49
(14) Consists of (i) 520,647 shares of Common Stock held of record by Mr. Stone,
(ii) 140,843 shares of restricted Common Stock, which replaces a presently
exercisable Management Warrant for 225,000 shares of Common Stock, (iii)
139,750 shares of Common Stock that may be purchased pursuant to presently
exercisable stock options awarded to Mr. Stone pursuant to his Employment
Agreement effective April 15, 1996, (the continuation of the Employment
Agreement is contingent upon the consummation of the acquisition of The
Fickes and Stone Knightsbridge Interests), (iv) 320,805 shares of Common
Stock held of record by Mr. Stone's wife and (v) 17,375 shares of Common
Stock held of record by Mr. Stone's adult children. Mr. Stone disclaims
beneficial ownership of Common Stock not held of record by him.
(15) Assumes the exercise of warrants or options to purchase 1,366,510 shares of
Common Stock and includes 353,344 shares of restricted Common Stock which
do not (absent certain contingencies) vest until March 31, 2001. See Notes
3 to 14.
PROPOSAL NUMBER 1
ELECTION OF CLASS II DIRECTORS
Under the Company's Certificate of Incorporation, which provides for a
"classified" board of directors, three directors will be elected at the meeting
as Class II directors, each to hold office for a three-year term expiring at the
2000 annual meeting of stockholders and/or until such director's successor shall
be elected and qualified. See "THE PENNCORP ANNUAL MEETING -- Voting at the
Annual Meeting."
Unless authority to vote for one or more of the nominees for Class II
Director is withheld, shares represented by proxies will be voted FOR the
election of the nominees named below. If at the time of the meeting any of the
nominees should be unwilling or unable to serve, the discretionary authority
provided in the proxy will be exercised to vote for a substitute or substitutes,
as the Board of Directors recommends. The Board has no reason to believe that
any of the nominees will be unwilling or unavailable to serve as a director.
The persons named below have been nominated for election as Class II
directors. Each nominee presently serves as a Class II director of the Company.
Also listed below are each of the currently serving Class I and Class III
directors of the Company.
CLASS II DIRECTORS NOMINEES
ALLAN D. GREENBERG, Age 52
Director
Mr. Greenberg has served as Vice Chairman of the Board and as a director of
the Company since August 1990. Mr. Greenberg also serves as Chairman of the
Board of ADG Insurance Advisors Inc. ("ADG"), a private consulting firm
specializing in life insurance actuarial and acquisition services. From 1981 to
1988, Mr. Greenberg was Vice President, Chief Actuary and a director of Geneve
Capital Group, Inc., and from 1984 to 1988 he also served as Executive Vice
President of Standard Security Life Insurance Company of New York. Mr. Greenberg
is a Fellow of the Society of Actuaries, a Fellow of the Canadian Institute of
Actuaries and a Member of the American Academy of Actuaries. Mr. Greenberg has
more than 28 years experience in the insurance industry. ADG provides consulting
services to the Company. See "EXECUTIVE COMPENSATION -- Compensation Committee
Interlocks and Insider Participation."
KENNETH ROMAN, Age 67
Director
Mr. Roman has been a director of the Company since April 1993. From 1988 to
1989, Mr. Roman served as Chairman and Chief Executive of The Ogilvy Group and,
from 1985 to 1989, as Chairman of Ogilvy & Mather Worldwide. He was Executive
Vice President of American Express from 1989 to 1991. He currently serves as a
Director of Compaq Computer Corporation, IBJ Schroder Bank & Trust Company,
Brunswick Corporation and Coty, Inc. In addition, Mr. Roman is a Vice Chairman
of The New York Botanical Garden and an Overseer of Memorial Sloan-Kettering
Cancer Center.
MAURICE W. SLAYTON, Age 59
Director
Mr. Slayton has been a director of the Company since August 1990. He is
Chairman of the Board, President and Chief Executive Officer of Conning &
Company ("Conning"). Mr. Slayton has over 20 years of
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<PAGE> 50
experience at Conning. Since joining Conning, Mr. Slayton co-founded the asset
management group and has worked in and actively developed all aspects of
Conning's business, including industry research, securities research, management
consulting, financial advisory services, and private equity funds. Mr. Slayton
also serves on the Board of Directors for Arlberg Holding Company, Inc., GAN
National Insurance Company, GAN North American Insurance Company, Cox Insurance
Holdings, Ltd. and MedSpan, Inc. Conning provides investment management services
to certain of the Company's insurance subsidiaries. See "CERTAIN
TRANSACTIONS -- Other Relationships."
CLASS III DIRECTORS (TERM EXPIRES IN 1998)
WILLIAM M. McCORMICK, Age 57
Director
Mr. McCormick has served as a director of the Company since August 1990 and
served as President and Chief Executive Officer of the Company from August 1990
to June 30, 1995. Prior to August 1990, Mr. McCormick served as Chairman of the
Board and Chief Executive Officer of Fireman's Fund Insurance Company from 1983
to 1990. From 1975 to 1983, Mr. McCormick held various management positions with
American Express Travel Related Services, Inc., American Express Company and
American Express International Banking Corporation, most recently serving as
President of American Express Travel Related Services, Inc. Mr. McCormick has
more than 20 years experience in the insurance and financial services
industries. On April 10, 1997, Mr. McCormick announced to the Company's Board of
Directors that he will tender his resignation as a director of the Company
effective at the Company's 1997 Annual Meeting of Stockholders.
BRUCE W. SCHNITZER, Age 53
Director
Mr. Schnitzer has been a director of the Company since August 1990. Since
1985, Mr. Schnitzer has served as Chairman of the Board of Wand Partners Inc.
(or predecessor investment activities), a private investment firm located in New
York, New York. Mr. Schnitzer also serves as a director of the following U.S.
companies with publicly quoted securities: AMRESCO Inc. (a manager of real
estate assets) and Nestor, Inc. (a technology company). From 1983 to 1985, Mr.
Schnitzer served as President and Chief Executive Officer of Marsh & McLennan,
Incorporated, an insurance brokerage firm. See "CERTAIN TRANSACTIONS -- Other
Relationships."
DAVID C. SMITH, Age 56
Director
Mr. Smith has been a director of the Company since September 1994. Since
1993 he has been a management consultant. Mr. Smith was with KPMG Peat Marwick
LLP ("Peat Marwick") from 1964 until his retirement in 1993, having served as
Vice Chairman-Tax from 1987 until 1993. He also served on the Board of Directors
and the Management Committee of Peat Marwick. Mr. Smith is a member of the
American Institute of Certified Public Accountants. He currently serves on the
Board of Governors of Citizens' Scholarship Foundation of America.
CLASS I DIRECTORS (TERM EXPIRES IN 1999)
DAVID J. STONE, Age 55
Chairman of the Board,
Chief Executive Officer and Director
Mr. Stone has served as Chairman of the Board and as a director of the
Company since its formation in 1989, as Chief Executive Officer since July 1,
1995, as President from July 1, 1995 until March 21, 1996 and as Chief Marketing
Officer from August 1990 until May 1993. Mr. Stone also serves as Chairman of
the Board and President of David J. Stone & Company, a New York based merchant
banking firm specializing in leveraged acquisitions organized in 1978. Mr. Stone
has more than 22 years experience in finance related
48
<PAGE> 51
business. During 1995 and 1996, Mr. Stone served, and currently serves, as a
manager of Knightsbridge Capital, which is the General Partner of the
Knightsbridge Fund. The Company is a 16.3% limited partner in the Knightsbridge
Fund. The Company and the Knightsbridge Fund are restructuring their business
relationship. See "CERTAIN TRANSACTIONS -- The Knightsbridge Restructuring Plan
and Related Litigation Settlement."
STEVEN W. FICKES, Age 43
President, Chief Financial Officer and Director
Mr. Fickes has served as Chief Financial Officer and as a director of the
Company since August 1990, as President since March 21, 1996, and as Vice
Chairman of the Board from August 1990 until March 21, 1996. From 1982 to July
1988, Mr. Fickes held various positions with Tillinghast, an international
actuarial consulting firm, most recently serving as the principal in charge of
its Washington, D.C. office, and from July 1988 to August 1990 was President of
a private consulting firm. Mr. Fickes is a Fellow of the Society of Actuaries
and a member of the American Academy of Actuaries. Mr. Fickes has more than 20
years experience in the insurance industry. During 1995 and 1996, Mr. Fickes
served, and currently serves, as a manager of Knightsbridge Capital. The Company
and the Knightsbridge Fund are restructuring their business relationship. See
"CERTAIN TRANSACTIONS -- The Knightsbridge Restructuring Plan and Related
Litigation Settlement."
THOMAS A. PLAYER, Age 57
Director
Mr. Player has been a director of the Company since August 1990. From June
1974 to June 1995, Mr. Player served as a founding partner of Neely & Player,
P.C., a law firm located in Atlanta, Georgia. In June 1995, Mr. Player became a
senior partner in the law firm of Morris, Manning & Martin, an Atlanta based
commercial law firm having offices in Washington, D.C. Mr. Player is the author
of a paper for the Organization of Economic Cooperation and Development
concerning insurer reorganization. Mr. Player has over 30 years experience in
the insurance industry.
COMMITTEES OF THE BOARD
The Board of Directors has established an Executive Committee composed of
Messrs. Stone (Chairman) and Fickes; a Compensation Committee composed of
Messrs. Roman (Chairman), Greenberg, Schnitzer, and Smith; an Audit Committee
composed of Messrs. Smith (Chairman), Player, Schnitzer, Slayton and McCormick;
a Finance Committee composed of Messrs. Fickes (Chairman), Stone and Schnitzer;
a Nominating Committee composed of Messrs. Stone (Chairman), Roman, Schnitzer
and Fickes; a Knightsbridge Committee composed of Messrs. Player (Chairman),
Schnitzer, Slayton, Smith and Roman; and a Compliance Committee consisting of
Messrs. Player (Chairman), Greenberg and Roman.
a. The Executive Committee.
The Executive Committee, between meetings of the PennCorp Board has
all the powers and can exercise all the duties of the Board of Directors in
the management of the business of the Company which may lawfully be
delegated to it by the Board of Directors and that are not in conflict with
specific powers conferred by the Board of Directors upon any other
committees of the Board of Directors.
b. Compensation Committee.
The Compensation Committee is responsible for reviewing all
compensation related matters requiring approval of the PennCorp Board and
recommending action to be taken by the Board of Directors on such matters,
including compensation (base salary, bonuses and long-term compensation) of
senior management of the Company and its subsidiaries. Members of the
Committee administer the Company's current stock option and warrant plans,
which includes making recommendations to the Board of Directors concerning
the timing of awards of options, the number of shares subject to options,
the identity of recipients of options, the price at which such options are
exercisable and the vesting
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<PAGE> 52
provisions of such options. The Company has established a Stock Award and
Stock Option Committee consisting of Messrs. Roman, Schnitzer and Smith to
administer the Stock Plan and the Incentive Plan.
c. Audit Committee.
The principal functions and duties of the Audit Committee are to
determine that appropriate procedures exist and are observed relating to
financial reporting and disclosure to shareholders and regulatory bodies,
and that required accounting practices, policies and procedures and
internal control systems are in place and can be relied upon to assure the
quality and accuracy of all such reports. In addition, the Audit
Committee's responsibilities include the following: selecting and
recommending to the Board of Directors the appointment of independent
public accountants; reviewing and approving the proposed scope of and fees
relating to the independent accountants' annual audit; and reviewing
internal audit activity, including scope, quality of staff and interaction
with independent accountants.
d. Nominating Committee.
The Nominating Committee is responsible for (i) reviewing the
performance of all directors; (ii) nominating persons to serve as directors
of the Company; and (iii) periodically reviewing the needs of the Company
and seeking additional directors as may be required and justified. The
Nominating Committee does not presently intend to consider nominees
proposed by stockholders. Stockholders who desire to nominate directors at
the 1998 annual meeting or at any special meeting called for such purpose
must follow the procedures described under "CERTAIN BYLAW PROVISIONS".
e. Finance Committee.
The principal functions and duties of the Finance Committee are to
monitor the financial affairs of the Company, including reviewing the
Company's investments, evaluating current financial decisions facing
management, including the adequacy of or need for capital, and assisting
management in the preparation of specific recommendations on financial
matters.
f. Compliance Committee.
The principal functions and duties of the Compliance Committee are to
monitor the corporate, regulatory and field compliance affairs of the
Company. This includes: (i) reviewing the adequacy of compliance staff,
including quality and promptness of response to compliance issues; (ii)
reviewing the adequacy and effectiveness of compliance programs and
policies, and proposing changes as appropriate; (iii) analyzing and
reviewing potential material compliance exposures to the corporation, and
management's plans for preventative measures; (iv) reviewing existing
material compliance matters, i.e., consumer complaints, litigation, etc.
and analyzing actions taken by management; and (v) reviewing the Company's
relationships with regulators.
g. Knightsbridge Committee.
In 1995, the Board of Directors created the Knightsbridge Committee to
evaluate all transactions submitted to the Company by Knightsbridge. The
Knightsbridge Committee's role is to determine whether a given transaction
(i) would be accepted by, and pursued for the account of, the Company
without any participation by Knightsbridge, (ii) would be accepted and
pursued jointly by the Company and Knightsbridge in such proportions as the
Company's Board of Directors and Knightsbridge agree or (iii) would be
rejected by the Company, in which case it may be pursued by Knightsbridge
for its own account. If the proposed restructuring of the Knightsbridge
relationship is consummated, the Knightsbridge Committee is not expected to
conduct any further business. See "PROPOSAL NUMBERS 5 AND 6 -- The
PennCorp/Knightsbridge Relationship" and "CERTAIN TRANSACTIONS -- The
PennCorp/Knightsbridge Relationship."
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<PAGE> 53
BOARD AND COMMITTEE ATTENDANCE
The PennCorp Board met eight times during 1996. In addition, the
Compensation Committee met ten times; the Audit Committee met four times; the
Nominating Committee met once; the Finance Committee met three times; the
Compliance Committee met three times; and the Knightsbridge Committee met eleven
times. Each of the Company's directors attended at least 75% of the aggregate
number of regular and special meetings of the PennCorp Board and of the
committees on which they served, except for Messrs. Greenberg and McCormick, who
attended 62% and 67%, respectively, of the aggregate number of regular and
special meetings of the PennCorp Board and the committees on which they served.
DIRECTORS' FEES
Directors of the Company are entitled to reimbursement of their reasonable
out-of-pocket expenses in connection with their travel to and attendance at
meetings of the Board of Directors or committees thereof. In addition, each
director of the Company who is not also an officer or salaried employee of the
Company (a "Non-Employee Director") receives an annual fee of $25,000 and a fee
of $2,000 for each meeting of the Board of Directors at which such director is
present. Each Non-Employee Director who is a member of a committee of the Board
of Directors also receives a fee of $1,000 for each meeting of such committee at
which such director is present. Committee chairmen receive an additional annual
fee of $5,000. In addition, in 1997 Mr. Player received a one-time fee of
$50,000 for his work as Chairman of the Knightsbridge Committee. The annual
retainer for Non-Employee Directors has been increased to $30,000 for 1997.
In addition to the foregoing, the 1992 Senior Management Warrant Program
(the "Warrant Plan") grants each Non-Employee Director (other than Messrs.
Greenberg and McCormick) a ten-year warrant to purchase up to 3,000 shares of
Common Stock upon his election to the Board of Directors. The exercise price of
such warrants with respect to each share of underlying Common Stock will be
equal to the fair market value of the Common Stock on the date of grant. Each
warrant vests and becomes exercisable in three equal annual installments
commencing on the first anniversary date after the date of the grant provided
that the Non-Employee Director is serving as a director of the Company on such
anniversary date. On November 5, 1992, each of Messrs. Schnitzer, Slayton and
Player were granted warrants to purchase up to 3,000 shares of Common Stock at
an exercise price of $14.19 per share. On April 1, 1993, Mr. Roman received a
warrant to purchase up to 3,000 shares of Common Stock at an exercise price of
$19.06 per share. On September 1, 1994, Mr. Smith received a warrant to purchase
up to 3,000 shares of Common Stock at an exercise price of $15.63 per share. No
further awards will be made under the Warrant Plan.
On November 5, 1992, Mr. Greenberg received a warrant to purchase up to
225,000 shares of Common Stock under the Warrant Plan. Each of Messrs. Stone,
Fickes and McCormick received identical warrants. These warrants vest in four
equal annual installments commencing November 5, 1993, provided the directors
continue to be officers or directors of the Company at each anniversary date.
All 225,000 of the warrants granted to each of Messrs. Fickes, Stone, Greenberg
and McCormick are vested. The initial exercise price for the warrants was $16.10
per share of Common Stock (representing 110% of the initial public offering
price per share of Common Stock). The 225,000 warrants of Messrs. Stone and
Fickes have been cancelled and replaced with 140,843 shares of restricted Common
Stock and a grant of options to acquire 225,000 shares of Common Stock under the
Stock Plan.
In 1996, each of Messrs. Player, Roman, Schnitzer, Slayton and Smith were
awarded 1,000 shares of Common Stock under the Stock Plan (plus cash to cover
tax liabilities). The Stock Plan provides for the grant of 1,000 shares of stock
to all future Non-Employee Directors elected to the Board of Directors and, in
addition, provides for an annual grant of 1,000 shares of Common Stock to each
then serving Non-Employee Director. If Proposal Number 2 if approved by the
stockholders, however, each then serving Non-Employee Director will receive an
annual option grant to purchase 7,500 shares of Common Stock in lieu of the
annual stock grant. Additionally, the Stock Plan generally enables Non-Employee
Directors to receive a portion of their annual fees in Common Stock. Certain
directors elected to receive Common Stock in lieu of a portion of their annual
fee for 1997. Certain other amendments to the Stock Plan affecting the Company's
Non-Employee Directors, as described in Proposal Number 2, will be made upon
approval by the Company's shareholders at the Annual Meeting.
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<PAGE> 54
PROPOSAL NUMBER 2
APPROVAL OF CERTAIN AMENDMENTS TO THE COMPANY'S
1996 STOCK AWARD AND STOCK OPTION PLAN
BACKGROUND AND PURPOSE
The PennCorp Board adopted the Stock Plan on May 23, 1996, and PennCorp's
stockholders approved the adoption of the Stock Plan at the 1996 Annual Meeting
of Stockholders. The purpose of the Stock Plan is to (i) provide incentives
which will attract, retain and motivate key officers, employees and Non-Employee
Directors whose present and potential contributions are important to the success
of the Company, (ii) align the interests of key officers, employees and
Non-Employee Directors with those of stockholders by providing incentives to key
officers, employees and Non-Employee Directors through the ownership and
performance of the Common Stock, and (iii) ensure that compensation paid under
the Stock Plan (other than compensation attributable to incentive stock options
("ISOs") under Section 422 of the Internal Revenue Code of 1986, as amended
("Code")) will be fully deductible for federal income tax purposes.
NON-EMPLOYEE DIRECTORS
On the date the amendments to the Stock Plan set forth below are approved
by stockholders, each Non-Employee Director (as defined in the Stock Plan) who
does not, on the date of the Annual Meeting and of each annual meeting of the
Company's stockholders that occurs thereafter, directly or indirectly, through
any contract, arrangement, understanding, relationship or otherwise, have or
share a direct or indirect Pecuniary Interest in more than 100,000 shares of the
Company's Common Stock, will automatically be granted on the date of each such
annual meeting of stockholders a stock option to purchase 7,500 shares of Common
Stock (the "Annual Option"). Each Annual Option shall not be exercisable for a
period of 18 months after the date of the grant (which shall be deemed to be
March 31, 1997 for the first such Annual Option), and the exercise price shall
be the Fair Market Value or "FMV" (as defined in the Stock Plan) of the
Company's Common Stock on the grant date. When each Annual Option becomes
exercisable, the Non-Employee Director may either exercise the option at the
exercise price (the "Exercise Election") or receive the appreciated value of the
option in a restricted Stock Award for the number of shares of Common Stock
determined by (a) multiplying the number of shares subject to the Annual Option
by the difference between the FMV on the exercise date and the exercise price,
and (b) dividing the result by 85% of FMV on the exercise date.
In addition, each Non-Employee Director (other than Messrs. Greenberg and
McCormick) who holds exercisable warrants under the Company's Warrant Plan shall
have the option, in lieu of exercising the warrants, to receive the appreciated
value of such warrants in a restricted Stock Award, which election must be made
within 10 days after stockholder approval of the proposed amendments to the
Stock Plan. The number of shares of restricted Stock to be issued shall be
determined by (a) multiplying the number of exercisable warrants held by the
Non-Employee Director by the difference between $32.25 (the FMV on March 31,
1997, the date the Board approved this grant) and the exercise price applicable
to each such warrants, and (b) dividing the product resulting pursuant to clause
(a) by 85% of FMV on March 31, 1997. In addition each such Non-Employee Director
who elects to receive the appreciated value of such warrants in a restricted
Stock Award will receive an option to purchase 3,000 shares of Common Stock at
the exercise price of $32.25 (the "Replacement Option"). The option shall be
fully exercisable on December 31, 1998, at which time the Non-Employee Director
may purchase the 3,000 shares or receive the appreciated value in a restricted
Stock Award calculated in the same manner as described above with respect to the
Annual Option. Restricted Stock Awards issued to Non-Employee Directors upon the
exercise of an Annual Option or in exchange for an outstanding warrant or option
will not vest for a period of three years from the date of the Stock Award and
will be forfeited if the Non-Employee Director ceases to be a director of the
Company for any reason other than as a result of a change of control or
ownership of the Company, the failure to receive the required votes of the
Company's stockholders approving the election of the Non-Employee Director, or
the Non-Employee Director's death or Disability (as defined in the Stock Plan).
Any right to receive shares of restricted Common Stock pursuant to a formula in
lieu of the exercise of an option or warrant is referred to as a "Restricted
Stock Election."
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Also, a Non-Employee Director who does not, directly or indirectly, through
any contract, arrangement, understanding, relationship or otherwise, have or
share a direct or indirect Pecuniary Interest in more than 100,000 shares of the
Company's Common Stock, may reduce, by up to 100 percent, the annual retainer
payable for services to be rendered by him or her as a member of the Board of
Directors and to receive in lieu thereof a Stock Award. Any such election must
be made in writing at least six months before the services are rendered giving
rise to such compensation. Such election may not be revoked or changed
thereafter except as to compensation for services rendered at least six months
after any such election to revoke or change is made in writing. If a
Non-Employee Director so elects to receive a Stock Award by reducing his or her
cash compensation as described above, the number of shares of Common Stock
underlying the Stock Award will be determined by dividing (x) the amount of the
cash compensation so reduced by (y) the product of (A) the fair market value of
the Common Stock (determined in accordance with the Stock Plan) on the last
business day of the month in which the cash compensation would have been paid in
the absence of such reduction, multiplied by (B) 90 percent, and disregarding
fractional shares.
OTHER CHANGES
In addition to the foregoing changes, the Company also proposes to amend
the Stock Plan to provide that the Option Committee may award recipients of
restricted Stock Awards the right to receive dividends in respect of such Stock
Awards, provided that any such dividends shall be paid in additional shares of
restricted Common Stock and subject to the same restrictions as the restricted
Stock Award.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a brief summary of the principal United States federal
income tax consequences under current federal income tax laws relating to awards
of options and stock to Non-Employee Directors pursuant to the amendments to the
Stock Plan. This summary is not intended to be exhaustive and, among other
things, does not describe state or local tax consequences.
Option Grants. The grant of the Annual Option, any right to make a
Restricted Stock Election, or of the Replacement Option will not be a taxable
event for a Non-Employee Director who receives such award.
The Exercise Election included in the Annual Option and the Replacement
Option will qualify as nonqualified stock options. In general, upon exercise of
a nonqualified stock option a Non-Employee Director will be treated as having
received ordinary income in an amount equal to the excess of (i) the fair market
value of the shares of Common Stock received upon exercise of such option at the
time of exercise over (ii) the exercise price, except with respect to shares
subject to restrictions that constitute a substantial risk of forfeiture for
federal income tax purposes (if any).
When any such restrictions on shares lapse, the Non-Employee Director will
recognize ordinary income in an amount equal to the excess of the fair market
value of the shares as of the date the restrictions lapse over the exercise
price. In the case of any shares subject to a substantial risk of forfeiture,
pursuant to Section 83(b) of the Code, a Non-Employee Director may, within 30
days after the date of exercise of the option, file a written election with the
Internal Revenue Service to have the excess of the fair market value of the
shares on the date of exercise of the option over the exercise price included in
his or her gross income at the time of such exercise (a "Section 83(b)
Election").
Stock Awards. A Non-Employee Director who receives a Stock Award pursuant
to a Restricted Stock Election or who receives a Stock Award in lieu of an
annual retainer (or in lieu of a dividend) will realize ordinary income at the
time of such receipt equal to the excess of the fair market value of the shares
subject to such Stock Award at such time over the amount, if any, paid for such
shares, unless such Stock Award is subject to restrictions that constitute a
substantial risk of forfeiture for federal income tax purposes. When any such
restrictions lapse, the Non-Employee Director will recognize ordinary income in
an amount equal to the excess of the fair market value of the shares as of the
date the restrictions lapse over the amount, if any, paid for such shares. A
Non-Employee Director may, within thirty days after the date of receipt of a
beneficial interest in stock pursuant to a Stock Award which is subject to a
substantial risk of forfeiture for federal income tax purposes, file a Section
83(b) Election with the Internal Revenue Service to have the fair market
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value of the shares on the date of grant over the amount, if any, paid for such
shares included in his or her gross income at the time of receipt of the shares
rather than on the date the substantial risk of forfeiture lapses.
Certain Securities Laws Considerations. A Non-Employee Director should
consult with his or her tax advisor as to whether the timing of income
recognition is deferred for any period following the exercise of an option or
the receipt of a Stock Award (i.e., the "Deferral Period") due to the operation
of Section 16(b) of the Exchange Act and the rules and regulations thereunder
that are related thereto. If there is a Deferral Period, absent a timely Section
83(b) Election, income recognition will be deferred until the expiration of the
Deferral Period.
The Company. In general, a deduction for federal income tax purposes will
be allowed to the Company in an amount equal to the ordinary income included by
the Non-Employee Director with respect to an option or a Stock Award, subject to
the limitations of Sections 162 of the Code.
The Board of Directors recommends that you vote FOR the approval of
Proposal Number 2.
PROPOSAL NUMBER 3
AMENDMENT TO THE CERTIFICATE OF INCORPORATION
TO INCREASE THE AUTHORIZED COMMON STOCK
The PennCorp Board is submitting to its stockholders a proposal to amend
the Certificate of Incorporation to increase the number of authorized shares of
Common Stock from 50,000,000 to 100,000,000.
As of November 24, 1997, there were 7,700,941 shares of Common Stock
authorized that are treasury shares or that have not been issued or reserved for
issuance upon the exercise or conversion of outstanding options, warrants and
convertible securities. Except for the shares of Common Stock to be reserved for
issuance to Messrs. Stone and Fickes as part of the consideration for the
purchase of The Fickes and Stone Knightsbridge Interests, as of the date of this
Proxy Statement, the PennCorp Board has no current plans to authorize the
issuance of any newly authorized shares of Common Stock, although the PennCorp
Board continually evaluates acquisition and financing opportunities as part of
which the Company might authorize the issuance of additional shares of Common
Stock.
Stockholders should note that certain disadvantages may result from the
authorization of additional shares of Common Stock. For example, the issuance of
a significant amount of Common Stock could result in a significant dilution of
the beneficial ownership and/or voting power of the holders of Common Stock.
Moreover, once authorized in the Certificate of Incorporation by the vote of the
holders of two-thirds of PennCorp's issued and outstanding shares of Common
Stock, such shares generally may be issued by the PennCorp Board without further
authorization from PennCorp's stockholders (although Delaware law would require
the holders of a majority of the shares of Common Stock present in person or by
proxy at a meeting called for that purpose to approve certain stock issuances
and PennCorp's listing agreement with the NYSE would require approval of certain
stock issuances by a majority of the votes cast on a proposal in person or by
proxy, provided that the total vote cast on the proposal represents over 50% in
interest of all securities entitled to vote on the proposal). Shares of Common
Stock may be issued for cash, property, services rendered or cancellation of
indebtedness, or any combination thereof, and at such price or prices and on
such terms as the PennCorp Board determines to be reasonable under the
circumstances and consistent with Delaware law. Moreover, holders of shares of
Common Stock have no preemptive rights and, therefore, will not be entitled to
preferential rights to purchase any additional shares of Common Stock that might
be issued in the future. In addition, the proposed amendment to the Certificate
of Incorporation could have an anti-takeover effect because the PennCorp Board
would have the ability to issue a significant number of shares of Common Stock
as a defense to an attempted takeover that the PennCorp Board considered not to
be in the best interests of PennCorp and its stockholders. While the approval of
the proposed amendment to the Certificate of Incorporation may have such an
effect, it is not currently the intention of the PennCorp Board to issue
additional shares of Common Stock for that purpose.
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The PennCorp Board has concluded that the amendment to the Certificate of
Incorporation to increase the authorized Common Stock is in the best interests
of stockholders and unanimously recommends that you vote FOR the approval of
Proposal Number 3.
PROPOSAL NUMBER 4
AMENDMENT TO THE CERTIFICATE OF INCORPORATION
TO REDUCE THE MINIMUM REQUIRED NUMBER OF DIRECTORS
The PennCorp Board is submitting to its stockholders a proposal to amend
the Certificate of Incorporation to reduce the minimum required number of
members constituting the PennCorp Board from nine to seven.
Section 8.1(b) of the Certificate of Incorporation currently provides that
the number of directors constituting the entire PennCorp Board shall be no less
than nine and no more than eleven (plus such number of directors as may be
elected from time to time pursuant to the terms of any preferred stock that may
be issued and outstanding from time to time). The PennCorp Board proposes to
reduce the minimum required number of directors from nine to seven to provide
the Company with greater flexibility in structuring its board, particularly in
light of the trend toward somewhat smaller boards of directors. The PennCorp
Board believes that such flexibility is important at this time because it
believes that there is a limited number of qualified persons who are willing to
serve as directors of public companies, and because outside directors are
increasingly limiting the number of boards on which they are willing to serve.
In addition, the PennCorp Board believes the Company could be managed more
decisively and effectively with a smaller number of directors. Mr. McCormick, a
director of the Company, has announced that he will be resigning from the
PennCorp Board effective at the Annual Meeting.
The PennCorp Board has concluded that the amendment to the Certificate of
Incorporation to reduce the minimum required number of directors is in the best
interests of stockholders and unanimously recommends that you vote FOR the
approval of Proposal Number 4.
PROPOSAL NUMBERS 5 AND 6
THE PENNCORP/KNIGHTSBRIDGE RELATIONSHIP
As described under "CERTAIN TRANSACTIONS -- The Knightsbridge Restructuring
Plan and Proposed Litigation Settlement," the Board of Directors is submitting
to stockholders a proposal for the acquisition of The Fickes and Stone
Knightsbridge Interests (Proposal No. 5) and a proposal for the acquisition of
the SW Financial Controlling Interest (Proposal No. 6).
Holders of PennCorp Common Stock should note that there are certain risks
associated with the decision to approve or disapprove the acquisitions of The
Fickes and Stone Knightsbridge Interests and the SW Financial Controlling
Interests.
Risks Associated with Approval of the Acquisition of The Fickes and Stone
Knightsbridge Interests. If PennCorp stockholders approve the acquisition of The
Fickes and Stone Knightsbridge Interests, each of Messrs. Stone and Fickes will
receive, on April 15, 2001, 173,160 shares of Common Stock. The Company cannot
predict what the value of those shares of PennCorp Common Stock will be when
issued. Based on the closing price of the Common Stock on the NYSE on November
24, 1997, the latest practicable date prior to the date of this Proxy Statement,
those shares had an aggregate value of approximately $11,623,538. However, stock
prices are likely to fluctuate substantially between the date hereof and April
15, 2001. In addition, upon the consummation of the acquisition of The Fickes
and Stone Knightsbridge Interests, and on each April 15 thereafter continuing
through April 15, 2001, each of Messrs Stone and Fickes will receive a cash
payment currently estimated to be $330,000. Moreover, there can be no assurance
that the Company will realize all the benefits it believes will result from the
acquisition by PennCorp of The Fickes and Stone Knightsbridge Interests.
Risks Associated with Failure to Approve the Acquisition of The Fickes and
Stone Knightsbridge Interests. If PennCorp stockholders do not approve the
acquisition of The Fickes and Stone Knightsbridge
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Interests, the 1996 employment agreements between PennCorp and Messrs. Stone and
Fickes will terminate and the PennCorp Board and Messrs. Stone and Fickes will
reconvene their negotiations on the definitive terms of the
PennCorp/Knightsbridge relationship and the terms of the employment of Messrs.
Stone and Fickes. Possible consequences of the failure to approve the
acquisition of The Fickes and Stone Knightsbridge Interests include (i) the
continuation of pending shareholder derivative lawsuits against the members of
the PennCorp Board (the settlement of which is contingent on stockholder
approval of this transaction), which could result in significant legal
expenditures and the need to expend considerable management and director time to
litigate the actions, and (ii) the inability of the PennCorp Board and Messrs.
Stone and Fickes to negotiate mutually satisfactory terms for the continuation
of the PennCorp/Knightsbridge relationship and of the terms of employment of
Messrs. Stone and Fickes.
Risks Associated with Approval of the Purchase of the SW Financial
Controlling Interest. If PennCorp stockholders approve the acquisition of the SW
Financial Controlling Interest, Messrs. Stone and Fickes will share $20,369,000
(or approximately 27.6%) of the Base Purchase Price, and will receive their
proportionate share of any interest paid on the Base Purchase Price plus any
payment made in respect of the purchase price protection right to the extent it
relates to their personal investment in SW Financial. Of their $20,369,000
portion of the Base Purchase Price, approximately $12,880,000 will be paid to
them by the Company in respect of their $7,000,000 personal investment in SW
Financial (representing the same amount they would have received under the
Original Agreement, had the Original Proposed Settlement been approved) and
approximately $7,489,000 will be paid to them by the Knightsbridge Fund in
accordance with its agreement of limited partnership. If the Amended Proposed
Settlement is not approved, Messrs. Stone and Fickes will share $24,775,000 (or
approximately 32.0%) of the Revised Base Purchase Price, and will receive their
proportionate share of any interest paid on the Revised Base Purchase Price and
of any payment made in respect of the purchase price protection right. Of their
$24,775,000 portion of the Revised Base Purchase Price, approximately
$17,471,000 will be paid to them by the Company in respect of their $7,000,000
personal investment in SW Financial (including their SW Financial warrants) and
approximately $7,305,000 will be paid to them by the Knightsbridge Fund in
accordance with its agreement of limited partnership. Moreover, there can be no
assurance that the Company will realize all the benefits it believes will result
from the ownership by PennCorp of the controlling equity interest in SW
Financial. PennCorp stockholders should also note that if they approve the
purchase of the SW Financial Controlling Interest, there can be no assurance
that the Amended Proposed Settlement will be approved by the Delaware Chancery
Court. In that event, the purchase price paid for the SW Financial Controlling
Interest will increase by $3,667,000, and Messrs. Stone and Fickes will receive
a cash payment totaling $24,775,000.
Risks Associated with Failure to Approve the Purchase of the SW Financial
Controlling Interest. Possible consequences of the failure to approve the
acquisition of the SW Financial Controlling Interest include (i) the
continuation of pending shareholder derivative lawsuits against the members of
the PennCorp Board (the settlement of which is contingent on stockholder
approval of this transaction), which could result in significant legal
expenditures and the need to expend considerable management and director time to
litigate the actions, and (ii) the inability of the Company to implement its
consolidation plans for its divisions, which depend in large part on the ability
to integrate certain PennCorp operations with SW Financial's operations.
IF PENNCORP STOCKHOLDERS APPROVE THE PURCHASE OF THE FICKES AND STONE
KNIGHTSBRIDGE INTERESTS AND THE SW FINANCIAL CONTROLLING INTEREST ON THE TERMS
CONTAINED HEREIN, PENNCORP INTENDS TO CONSUMMATE THOSE TRANSACTIONS, WHETHER OR
NOT THE AMENDED PROPOSED SETTLEMENT IS APPROVED. HOWEVER, IF PENNCORP
STOCKHOLDERS DO NOT APPROVE BOTH THOSE TRANSACTIONS, THERE WILL NOT BE A
SETTLEMENT OF THE SHAREHOLDER DERIVATIVE LITIGATION ON THE TERMS DISCUSSED
HEREIN, THE EMPLOYMENT AGREEMENTS OF MESSRS. STONE AND FICKES WILL EXPIRE, AND
MESSRS. STONE AND FICKES AND THE KNIGHTSBRIDGE COMMITTEE WILL RECONVENE THEIR
NEGOTIATIONS ON THE DEFINITIVE TERMS OF THE KNIGHTSBRIDGE RELATIONSHIP.
The PennCorp Board (Messrs. Stone, Fickes and Greenberg abstaining)
unanimously recommends that stockholders vote FOR the acquisition of The Fickes
and Stone Knightsbridge Interests (Proposal No. 5).
The PennCorp Board (Messrs. Stone, Fickes and Greenberg abstaining)
unanimously recommends that stockholders vote FOR the acquisition of the SW
Financial Controlling Interest (Proposal No. 6).
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PROPOSAL NUMBER 7
THE ADJOURNMENT PROPOSAL
PennCorp is submitting to its stockholders a proposal to authorize the
named attorneys-in-fact to vote in favor of the adjournment of the Annual
Meeting in the event that there are not sufficient votes to approve the other
proposals set forth in this Proxy Statement at the time of the Annual Meeting.
Even though a quorum is present at the Annual Meeting, it is possible that
PennCorp would not have received sufficient votes to approve one or more of the
election of Class II Directors, the amendments to the Stock Plan, the amendments
to the Certificate of Incorporation, the purchase of The Fickes and Stone
Knightsbridge Interests and/or the purchase of the SW Financial Controlling
Interest. In any of those events, the relevant proposals being submitted by
PennCorp could not be approved at the Annual Meeting unless it were adjourned in
order to permit further solicitation of proxies.
In order to allow the proxies that have been received by PennCorp, at the
time of the Annual Meeting, to be voted for such adjournment, if necessary,
PennCorp has submitted the question of adjournment under such circumstances, and
only under such circumstances, to its stockholders for their consideration. A
majority of the shares of Common Stock represented and voting at the Annual
Meeting is required in order to approve any such adjournment. In addition, the
authority to adjourn the meeting may be exercised with respect to one or more of
the proposals, with the effect that certain matters may be approved at the
Annual Meeting and the vote on remaining matters may be adjourned to a
subsequent date to permit the solicitation of additional proxies.
The PennCorp Board unanimously recommends that its stockholders vote their
proxies in favor of the adjournment proposal so that their proxies may be used
for such purpose, should it become necessary. Properly executed proxies will be
voted in favor of such adjournment unless otherwise noted thereon. If it is
necessary to adjourn the Annual Meeting, no notice of the time and place of the
adjourned meeting is required to be given to stockholders other than an
announcement of such time and place at the Annual Meeting. This adjournment
proposal relates only to an adjournment occurring for purposes of soliciting
additional proxies for any or all of the submitted proposals in the event that
there are insufficient votes to approve such proposals at the Annual Meeting.
Any other adjournment (e.g., an adjournment required because of the absence of a
quorum) would be voted upon pursuant to the discretionary authority granted by
the proxy.
The PennCorp Board retains full authority to postpone the Annual Meeting
prior to such meeting being convened, without the consent of any stockholder.
OTHER MATTERS
As of the date of the Proxy Statement, the PennCorp Board knows of no other
business to be presented for action at the meeting or any adjournment thereof.
However, if any other business is properly brought before the meeting or any
adjournment thereof, the proxies solicited hereby confer discretionary authority
in the persons named therein and those persons will vote or act in accordance
with their best judgment with respect to such matter.
INDEPENDENT AUDITORS
The PennCorp Board has selected KPMG Peat Marwick LLP ("KPMG") as the
Company's auditors for the 1997 fiscal year. KPMG also served as the Company's
auditors for fiscal year 1996. It is anticipated that representatives of KPMG
will be present at the Annual Meeting and will have an opportunity to make a
statement if they so desire and to answer any appropriate questions. Although in
past years the PennCorp Board has submitted the appointment of the Company's
auditors to the Company's stockholders for ratification, the PennCorp Board has
chosen not to do so at the Annual Meeting because of the fact that the meeting
will not be held until December 31, 1997. The PennCorp Board intends to submit
to stockholders at the 1998 annual meeting of stockholders the ratification of
the firm of accountants chosen as the Company's auditors for the fiscal year
1998.
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SECTION 16(a) REPORTING
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors and executive officers, and persons who beneficially own
more than 10% of the Common Stock or other equity securities of the Company, to
file with the Securities and Exchange Commission initial reports of beneficial
ownership (Form 3), reports of changes in beneficial ownership (Form 4) and
annual statements of beneficial ownership (Form 5). Executive officers,
directors and more than 10% beneficial owners are required to provide the
Company with copies of all Section 16(a) reports they file. Each of the
following officers failed to file a Form 5 on a timely basis to report a stock
option grant in 1996:
Charles H. Lubochinski
Elizabeth C. Malone
James P. McDermott
Michael J. Prager
Scott D. Silverman
CERTAIN BYLAW PROVISIONS
The PennCorp Board has established May 21, 1998 as the date for the 1998
annual meeting of stockholders.
The Bylaws establish an advance notice procedure with regard to business
proposed to be submitted by a stockholder at any annual or special meeting of
stockholders of the Company, including the nomination of candidates for election
as directors. The procedure provides that a notice of proposed stockholder
business must be timely given in writing to the Secretary of the Company prior
to the meeting. In all cases, to be timely, notice relating to the 1998 annual
meeting must be received at the principal executive office of the Company not
less than 60 days nor more than 90 days before May 21, 1998.
Notice to the Company from a stockholder who proposes to nominate a person
at a meeting for election as a director must contain all information relating to
such person that is required to be disclosed in solicitations of proxies for
election of directors, or is otherwise required, in each case pursuant to
Regulation 14A under the Exchange Act, including such person's written consent
to be named in the proxy statement as a nominee and to serve as a director if
elected.
The chairman of a meeting of stockholders may determine that a person is
not nominated in accordance with the nomination procedure, in which case such
person's nomination will be disregarded. If the chairman of a meeting of
stockholders determines that other business was not properly brought before such
meeting in accordance with the Bylaw procedures, such business will not be
conducted at the meeting. Nothing in the nomination procedure or the business
procedure will preclude discussion by any stockholder of any nomination or
business properly made or brought before the annual or any other meeting in
accordance with the above mentioned procedures.
STOCKHOLDER PROPOSALS
Any proposal which a stockholder intends to have included in the Company's
proxy statement relating to the 1998 annual meeting of Stockholders must be
received at the Company's executive office not later than March 21, 1998.
Stockholders who intend to nominate directors or to bring other business before
the meeting must also comply with the procedures set forth in the Company's
Bylaws, as described under "Certain Bylaw Provisions." The Company will furnish
copies of the appropriate Bylaw provision upon written request to the Secretary
of the Company at its principal executive office.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Securities and
Exchange Commission (the "Commission") pursuant to the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), are incorporated by reference into
this Proxy Statement: (i) PennCorp's Annual Report on Form 10-K for the year
ended December 31, 1996, as amended by Form 10-K/A (Amendments Nos. 1, 2 and 3);
(ii) PennCorp's Quarterly Report on Form 10-Q for the quarter ended March 31,
1997, as amended by a Form 10-Q/A; (iii) PennCorp's Quarterly Report on Form
10-Q for the fiscal quarter ended June 30, 1997, as amended by a Form 10-Q/A;
(iv) PennCorp's Quarterly Report on Form 10-Q for the quarter ended September
30, 1997; (v) PennCorp's Current Report on Form 8-K dated November 14, 1997; and
(vi) the audited financial statements of UC Life for the years ended December
31, 1995 and 1996 included in the Annual Report on Form 10-K for the year ended
December 31, 1996 of United Companies Life Insurance Company (subsequently
renamed United Life & Annuity Insurance Company).
All documents and reports filed by PennCorp with the Commission pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
Proxy Statement and prior to the date of the Annual Meeting shall be deemed to
be incorporated by reference herein and to be a part hereof from the date of
filing of such documents and reports. Any statement incorporated by reference
herein shall be deemed to be modified or superseded for purposes of this Proxy
Statement to the extent that a statement contained herein or in any other
subsequently filed document or report which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Proxy Statement.
The Company hereby undertakes to provide, without charge, to each person to
whom this Proxy Statement is delivered, upon written or oral request of such
person and by first class mail or other equally prompt means within one business
day of receipt of such request, a copy of any and all information that has been
incorporated by reference in this Proxy Statement (not including exhibits to the
information that is incorporated by reference unless such exhibits are
specifically incorporated by reference into the information that the Proxy
Statement incorporates). The foregoing undertaking applies to all information
contained in documents filed subsequent to the date on which definitive copies
of this Proxy Statement are sent or given to securityholders, up to the date of
responding to any such request. Requests for copies of the information
incorporated by reference in this Proxy Statement should be directed to the
Corporate Secretary of the Company, c/o PennCorp Financial, Inc., 3 Bethesda
Metro Center, Suite 1600, Bethesda, Maryland 20814 (301-656-1777).
By Order of the Board of Directors,
SCOTT D. SILVERMAN
Secretary
December 2, 1997
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ANNEX A
CONFIDENTIAL
December 2, 1997
Board of Directors
PennCorp Financial Group, Inc.
745 Fifth Avenue
New York, New York 10151
Gentlemen:
You have requested that we reaffirm our fairness opinion referenced below.
On September 19, 1996, we delivered to you our opinion (the "Opinion") with
respect to the fairness, as of April 15, 1996, from a financial point of view,
to PennCorp Financial Group, Inc. (the "Company") and its stockholders (other
than David J. Stone and Steven W. Fickes) of the consideration proposed to be
paid by the Company to its two most senior officers, David J. Stone and Steven
W. Fickes, pursuant to the transaction described therein. The Opinion is
attached hereto as Exhibit A. Capitalized terms used herein and not otherwise
defined have the meaning given in the Opinion.
In connection with your request and with your permission, we have only
undertaken to re-examine the business, legal, financial and other information
stated or referenced in the Opinion upon which we based our conclusions stated
therein. Further, our reaffirmation is subject to all of the assumptions stated
or referenced in the Opinion. However, at your request we have examined the
consideration described in the Proxy Statement, dated November 26, 1997, of the
Company that is proposed to be paid by the Company pursuant to the Transaction
and have determined that such consideration is substantially similar to the
Consideration described in the Opinion.
Our financial advisory services and this reaffirmation are provided for the
use of the Board of Directors of the Company (or committees thereof) and do not
constitute, and shall not be deemed to constitute, a recommendation to any
stockholder of the Company as to how such stockholder should vote on the
proposed transaction described in the Opinion. Except as otherwise required by
law, this reaffirmation of Opinion may not be published or otherwise used or
referred to, nor shall any public reference to Smith Barney Inc. be made,
without our prior consent, it being understood we consent to the reference to
this reaffirmation of Opinion in any proxy statement proposed by the Company for
use by its stockholders in considering whether to vote to approve the
transaction described in the Opinion.
Based upon and subject to the foregoing, our experience as investment
bankers and the information and assumptions stated in the Opinion, we hereby
reaffirm to you our opinion that, as of April 15, 1996, the Consideration to be
paid by the Company to Messrs. Fickes and Stone pursuant to the Transaction is
fair, from a financial point of view, to the Company and its stockholders (other
than Messrs. Fickes and Stone).
Very truly yours,
/s/ SMITH BARNEY INC.
A-1
<PAGE> 63
EXHIBIT A TO ANNEX A
CONFIDENTIAL
September 19, 1996
Board of Directors
PennCorp Financial Group, Inc.
745 Fifth Avenue
New York, New York 10151
Gentlemen:
You have requested our opinion, as of April 15, 1996, with respect to the
fairness, from a financial point of view, to PennCorp Financial Group, Inc. (the
"Company") and its stockholders (other than David J. Stone and Steven W. Fickes)
of the consideration proposed to be paid by the Company to its two most senior
officers, David J. Stone and Steven W. Fickes, pursuant to the transaction
referenced below.
As more fully described in the Company's Proxy Statement dated June 11,
1996 (the "Proxy Statement"), the Company intends to enter into an agreement
with Messrs. Stone and Fickes to purchase (i) their interests in Knightsbridge
Management L.L.C. ("Management"), Knightsbridge Capital L.L.C. ("Capital") and
Knightsbridge Consultants L.L.C. ("Consultants") and (ii) the economic interest
of Capital as the general partner of Knightsbridge Capital Fund I, L.P. (the
"Knightsbridge Fund", and, together with Capital, Consultants and Management,
the "Knightsbridge Entities"). The consideration for such purchases (the
"Consideration") is to be a $10 million promissory note of the Company bearing
interest payable in cash at a fixed rate equal to the IRS applicable mid-term
federal rate for the month in which such note is issued and payable at maturity
in capital stock of the Company as more fully described in the Proxy Statement.
The purchase by the Company of the respective interests of Messrs. Stone and
Fickes in the Knightsbridge Entities in exchange for the Consideration is
referred to herein as the "Transaction."
In connection with our opinion, we reviewed the financial terms of the
Transaction and have spoken with Messrs. Stone and Fickes and other officers of
the Company to discuss the business, operations and other prospects of the
Knightsbridge Entities. We examined certain business, legal and financial
information relating to the Knightsbridge Entities, as well as certain other
data for the Knightsbridge Entities provided to us by the Company and Messrs.
Stone and Fickes. In addition to the foregoing, we conducted such other analyses
and examinations and considered such other financial, economic and market
criteria as we deemed necessary in arriving at our opinion.
In rendering our opinion, we have assumed and relied, without independent
verification, upon the accuracy and completeness of all financial and other
information publicly available or furnished to or otherwise discussed with us.
With respect to financial forecasts and other information provided to or
otherwise discussed with us, we assumed that such forecasts and other
information were reasonably prepared and were based upon and reflected the best
currently available estimates and judgments of the management of the Company,
including Messrs. Fickes and Stone, as to the expected future financial
performance of the Knightsbridge Entities and certain other entities. We have
also made certain other assumptions as we deemed necessary and appropriate.
With your permission, we have assumed, without independent analysis, the
fairness to the Company and its stockholders of the transactions and events
described in the Proxy Statement under the headings "The Knightsbridge Fund" and
"The Southwestern Financial Investment." This opinion also assumes (i) the
retention of the right to acquire United Companies Life Insurance Company by the
Knightsbridge Fund as well as the related management and other transaction fees
that would have been payable to Management and Consultants as a result of such
acquisition, (ii) that the employment agreements between the Company and each of
Messrs. Stone and Fickes described in the Proxy Statement are on fair and
reasonable terms and (iii) the retention by Management and Consultants of the
management fees and other fees associated with the Knightsbridge Fund's
investment in Southwestern Financial Corporation.
A-2
<PAGE> 64
We have not made or been provided with an independent evaluation or
appraisal of the assets or liabilities (contingent or otherwise) of the
Knightsbridge Entities. In connection with our engagement, we were not asked to
(and did not) contact third parties to solicit indications of interest in a
possible acquisition of the respective interests of Messrs. Stone and Fickes in
the Knightsbridge Entities. We have not been asked to consider, and our opinion
does not address, the relative merits of the Transaction as compared to any
alternative business strategy that might exist for the Company or any other
transaction in which the Company might engage. Furthermore, we have not been
asked to express, and we are not expressing, any opinion as to the fairness of
the effects of the Transaction on any persons other than the Company and its
stockholders (but not including Messrs. Stone and Fickes). Our opinion herein is
necessarily based upon financial, stock market and other conditions and
circumstances existing and disclosed to us as of the date hereof.
Pursuant to our engagement, Smith Barney, Inc. has rendered financial
advisory services to the Company in connection with the Transaction and will
receive a fee (which will include the reimbursement of out-of-pocket expenses
and attorney's fees) for this opinion and for such financial advisory services.
In the ordinary course of our business, we may actively trade the equity and
debt securities of the Company for our own account or for the account of our
customers and, accordingly, may at any time hold a long or short position in
such securities. Smith Barney Inc. has also provided investment banking and
financial advisory services to the Company and its affiliates. In addition,
Smith Barney Inc. has been engaged to render a fairness opinion with respect of
the proposed purchase by the Company of the respective investments of the
Knightsbridge Fund and Messrs. Stone and Fickes in Southwestern Financial
Corporation.
Our financial advisory services and this opinion are provided for the use
of the Board of Directors of the Company (or committees thereof) in evaluating
the Transaction and do not constitute, and shall not be deemed to constitute, a
recommendation by us to any stockholder of the Company as to how such
stockholder should vote on the proposed Transaction. Except as otherwise
required by law, our opinion may not be published or otherwise used or referred
to, nor shall any public reference to Smith Barney Inc. be made, without our
prior consent, it being understood we consent to the publication of this opinion
as an annex to any proxy statement proposed by the Company for use by its
stockholders in considering whether to vote to approve the Transaction, however,
such publication of our opinion is not intended to be, and shall not be deemed
to constitute, a recommendation by us to any stockholder of the Company as to
how such stockholder should vote with regard to approving the Transaction.
Based upon and subject to the foregoing, our experience as investment
bankers and other factors we deemed relevant, we are of the opinion, as of April
15, 1996, that the Consideration to be paid by the Company to Messrs. Fickes and
Stone pursuant to the Transaction is fair, from a financial point of view, to
the Company and its stockholders (other than Messrs. Fickes and Stone).
Very truly yours,
/s/ SMITH BARNEY INC.
A-3
<PAGE> 65
CONFIDENTIAL
ANNEX B
December 2, 1997
Board of Directors
PennCorp Financial Group, Inc.
745 Fifth Avenue
New York, New York 10151
Gentlemen:
You have requested that we reaffirm our fairness opinion referenced below.
On January 22, 1997, we delivered to you our written opinion (the
"Opinion") with respect to the fairness from a financial point of view, to
PennCorp Financial Group, Inc. (the "Company") and its stockholders (other than
David J. Stone and Steven W. Fickes) of the consideration proposed to be paid by
the Company to the Knightsbridge Fund and Messrs. Stone and Fickes pursuant to
the transaction described therein. The Opinion (which has been revised to update
references therein to the current Proxy Statement) is attached hereto as Exhibit
A. Capitalized terms used herein and not otherwise defined have the meaning
given in the Opinion.
In connection with your request and with your permission, we have
undertaken to re-examine the business, legal, financial and other information
stated or referenced in the Opinion upon which we based our conclusions stated
therein. We have also examined certain additional business, legal and financial
information, forecasts and other data, including a Memorandum of Understanding
dated November 25, 1997, between the Company, the Knightsbridge Fund and Messrs.
Stone and Fickes, provided to us by the Company. Our reaffirmation is subject to
all of the assumptions stated or referenced in the Opinion.
Our financial advisory services and this reaffirmation are provided for the
use of the Board of Directors of the Company (or committees thereof) and do not
constitute, and shall not be deemed to constitute, a recommendation to any
stockholder of the Company as to how such stockholder should vote on the
proposed transaction described in the Opinion. Except as otherwise required by
law, this reaffirmation of Opinion may not be published or otherwise used or
referred to, nor shall any public reference to Smith Barney Inc. be made,
without our prior consent, it being understood we consent to the reference to
this reaffirmation of Opinion in any proxy statement proposed by the Company for
use by its stockholders in considering whether to vote to approve the
transaction described in the Opinion.
Based upon and subject to the foregoing, our experience as investment
bankers and the information and assumptions stated in the Opinion, we hereby
reaffirm to you our opinion that the payment of either the Settlement
Consideration or the Non-Settlement Consideration, as adjusted pursuant to the
Memorandum of Understanding, to be paid by the Company to the Knightsbridge Fund
and Messrs. Stone and Fickes pursuant to the Transaction is fair, from a
financial point of view, to the Company and its stockholders (other than Messrs.
Fickes and Stone).
Very truly yours,
/s/ SMITH BARNEY INC.
B-1
<PAGE> 66
EXHIBIT A TO ANNEX B
CONFIDENTIAL
January 22, 1997
Board of Directors
PennCorp Financial Group, Inc.
745 Fifth Avenue
New York, New York 10151
Gentlemen:
You have requested our opinion as to the fairness, from a financial point
of view, to PennCorp Financial Group, Inc. (the "Company") and its stockholders
(other than David J. Stone and Steven W. Fickes) of the consideration proposed
to be paid by the Company to the Knightsbridge Capital Fund I, L.P. (the
"Knightsbridge Fund") and the Company's two most senior officers, David J. Stone
and Steven W. Fickes, pursuant to the transaction referenced below.
As more fully described in the Proxy Statement to which this letter is to
be affixed as an Exhibit, the Company, through a wholly owned subsidiary,
currently owns approximately 69% of the outstanding common stock and warrants to
purchase common stock of Southwestern Financial Corporation ("SW Financial") and
is proposing to enter into an agreement with the Knightsbridge Fund and Messrs.
Stone and Fickes, with respect to the purchase by the Company of the investments
of the Knightsbridge Fund and Messrs. Stone and Fickes in SW Financial
(collectively, the "SW Financial Controlling Interests"). The consideration for
such purchase is dependent upon whether the proposed settlement (the
"Settlement") of the stockholder litigation filed on January 11, 1996 against
the Company and each of its directors, individually, is approved by the Court of
Chancery of the State of Delaware. Pursuant to the terms of the proposed
Settlement, Messrs. Stone and Fickes will agree not to exercise their respective
warrants to purchase common stock of SW Financial (the "Warrants"), which
Warrants are otherwise proposed to be purchased by the Company. If the
Settlement is approved by the Court of Chancery, the consideration to be paid by
the Company for the SW Financial Controlling Interests, which will exclude the
Warrants, will be $67,500,000 in cash (the "Settlement Consideration"). If the
Settlement is not approved, the consideration to be paid by the Company for the
SW Financial Controlling Interests, which will include the Warrants, will be
$69,600,000 in cash (the "Non-Settlement Consideration"). The proposed purchase
by the Company of the SW Financial Controlling Interests in exchange for either
the Settlement Consideration or the Non-Settlement Consideration is referred to
herein as the "Transaction".
In connection with our opinion, we discussed with Messrs. Stone and Fickes
and other officers of the Company and of SW Financial various matters with
respect of the business, operations and other prospects of SW Financial. We
examined certain business, legal and financial information relating to SW
Financial, as well as certain financial forecasts and other data for SW
Financial provided to us by SW Financial, the Company and Messrs. Stone and
Fickes. We also analyzed certain financial, stock market and other publicly
available information relating to other companies whose operations we considered
relevant in evaluating the operations of SW Financial. In addition to the
foregoing, we conducted such other analyses and examinations and considered such
other financial, economic and market criteria as we deemed necessary in arriving
at our opinion.
In rendering our opinion, we have assumed and relied, without independent
verification, upon the accuracy and completeness of all financial and other
information publicly available or furnished to or otherwise discussed with us.
With respect to financial forecasts and other information provided to or
otherwise discussed with us, we assumed that such forecasts and other
information were reasonably prepared and were based upon and reflected the best
currently available estimates and judgments of the management of SW Financial
and of the Company, including Messrs. Fickes and Stone, as to the expected
future financial performance of SW Financial. We have also made certain other
assumptions as we deemed necessary and appropriate.
B-2
<PAGE> 67
With your permission, we have assumed, without independent analysis, the
fairness to the Company and its stockholders of the transactions and events
described in the Proxy Statement under the headings "CERTAIN TRANSACTIONS -- The
PennCorp/Knightsbridge Relationship."
We have not made or been provided with an independent evaluation or
appraisal of the assets or liabilities (contingent or otherwise) of SW
Financial. In connection with our engagement, we were not asked to (and did not)
contact third parties to solicit indications of interest in a possible
acquisition of SW Financial. In addition, we have not been asked to consider,
and our opinion does not address, the relative merits of the Transaction as
compared to any alternative business strategy that might exist for the Company
or any other transaction in which the Company might engage. Furthermore, we have
not been asked to express, and we are not expressing, any opinion as to the
fairness of the effects of the transaction on any persons other than the Company
and its stockholders (but not including Messrs. Stone and Fickes). Our opinion
herein is necessarily based upon financial, stock market and other conditions
and circumstances existing and disclosed to us as of the date hereof.
Pursuant to our engagement, Smith Barney Inc. has rendered financial
advisory services to the Company in connection with the Transaction and will
receive a fee (which will include the reimbursement of out-of-pocket expenses
and attorney's fees) for this opinion and for such financial advisory services.
In the ordinary course of our business, we may actively trade the equity and
debt securities of the Company for our own account or for the account of our
customers and, accordingly, may at any time hold a long or short position in
such securities. In addition, Smith Barney Inc. has provided investment banking
and financial advisory services to the Company and its affiliates, including the
rendering of a fairness opinion with respect of the proposed purchase by the
Company of (i) the interests of Messrs. Stone and Fickes in Knightsbridge
Management L.L.C. and Knightsbridge Consultants L.L.C. and (ii) certain economic
interests of Knightsbridge Capital L.L.C. as the general partner of the
Knightsbridge Fund.
Our financial advisory services and this opinion are provided for the use
of the Board of Directors of the Company (or committees thereof) in evaluating
the Transaction and do not constitute, and shall not be deemed to constitute, a
recommendation to any stockholder of the Company as to how such stockholder
should vote on the proposed Transaction. Except as otherwise required by law,
our opinion may not be published or otherwise used or referred to, nor shall any
public reference to Smith Barney Inc. be made, without our prior consent, it
being understood we consent to the publication of this opinion as an annex to
any proxy statement proposed by the Company for use by its stockholders in
considering whether to vote to approve the Transaction, however, such
publication of our opinion is not intended to be, and shall not be deemed to
constitute, a recommendation by us to any stockholder of the Company as to how
such stockholders should vote with respect to approving the Transaction.
Based upon and subject to the foregoing, our experience as investment
bankers and other factors we deemed relevant, we are of the opinion, as of the
date hereof, that the payment of either the Settlement Consideration or the
Non-Settlement Consideration by the Company to Knightsbridge Fund and Messrs.
Stone and Fickes pursuant to the Transaction would be fair, from a financial
point of view, to the Company and its stockholders (other than Messrs. Fickes
and Stone).
Very truly yours,
/s/ SMITH BARNEY INC.
B-3
<PAGE> 68
PENNCORP FINANCIAL GROUP, INC.
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
THE COMPANY FOR ANNUAL MEETING OF STOCKHOLDERS, DECEMBER 31, 1997
The undersigned hereby constitutes and appoints Scott D. Silverman, James P.
McDermott, and each of them, as their true and lawful agents and proxies with
full power of substitution in each, to represent the undersigned at the Annual
Meeting of Stockholders of PennCorp Financial Group, Inc. to be held at 3
Bethesda Metro Center, Bethesda, Maryland on Monday, December 31, 1997 and at
any adjournments thereof, on all matters coming before said meeting.
Election of Directors, Nominees: (change of address/comments)
Allan D. Greenberg ---------------------------------------
Kenneth Roman ---------------------------------------
Maurice Slayton ---------------------------------------
---------------------------------------
(If you have written in the above space,
please mark the corresponding box on the
reverse side of this card)
YOU ARE ENCOURAGED TO SPECIFY YOUR CHOICE BY MARKING THE * * * * * * * *
APPROPRIATE BOXES, SEE REVERSE SIDE, BUT YOU NEED NOT MARK * SEE REVERSE *
ANY BOXES IF YOU WISH TO VOTE IN ACCORDANCE WITH THE BOARD * SIDE *
OF DIRECTOR'S RECOMMENDATIONS. * * * * * * * *
<PAGE> 69
[X] Please mark your
votes as in this
example.
This Proxy, when properly executed, will be voted in the manner directed
herein. If no direction is made, this proxy will be voted FOR election of
directors and FOR Proposals 2 through 7.
- --------------------------------------------------------------------------------
The Board of Directors recommends a vote FOR proposals 1 through 7.
- --------------------------------------------------------------------------------
FOR WITHHELD
1. Election of Directors [ ] [ ]
(See reverse)
For, except vote withheld from the following Nominee(s):
- -----------------------------------------------------------------
FOR AGAINST ABSTAIN
2. Approval of adoption of
certain amendments to
the 1996 Stock Award
and Stock Option Plan. [ ] [ ] [ ]
3. Approval of Amendment to
Certificate of Incorporation [ ] [ ] [ ]
to Increase Authorized
Common Stock
4. Approval of Amendment to
Certificate of Incorporation
to Reduce Minimum Required
Number of Directors [ ] [ ] [ ]
5. Approval of Purchase of The
Fickes and Stone Knightsbridge
Interests [ ] [ ] [ ]
6. Approval of Purchase of the
SW Financial Controlling
Interest [ ] [ ] [ ]
7. Approval of the Adjournment
Proposal [ ] [ ] [ ]
- --------------------------------------------------------------------------------
The signer hereby revokes all proxies
heretofore given by the signer to vote at
said meeting or any adjournments thereof.
NOTE: Please sign exactly as name appears
hereon. Joint owners should each
sign. When signing as attorney,
executor, administrator, trustee or
guardian, please give full title as
such.
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SIGNATURE(S) DATE
