<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1997
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Commission file number 1-11422
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PennCorp Financial Group, Inc.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 13-3543540
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
745 Fifth Avenue, New York, New York 10151
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (212) 832-0700
--------------------
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Former Name, Former Address and Former Fiscal Year,
If Changes Since Last Report
Indicate by check [X] whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days Yes X No
---- ----
Indicate the number of shares outstanding of each of the Issuer's
common stock, as of the latest practicable date.
Class 28,026,042
- ---------------------------------- ------------------------------------
Common Stock, $.01 Par Value As of August 12, 1997
<PAGE> 2
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Condensed Balance Sheets -
June 30, 1997, and December 31, 1996 . . . . . . . . . . . . . . . 3
Consolidated Condensed Statements of Income -
Three Month and Six Month Periods Ended
June 30, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Condensed Statements of Cash Flows -
Six Month Periods Ended June 30, 1997 and 1996 . . . . . . . . . . 5
Notes to Unaudited Consolidated Condensed Financial Statements . . . . 6
Review by Independent Certified Public Accountants . . . . . . . . . . 11
Independent Auditors' Review Report . . . . . . . . . . . . . . . . . . 12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . . . 13
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . 25
SIGNATURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
INDEX TO EXHIBITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
</TABLE>
<PAGE> 3
PART I. -- FINANCIAL INFORMATION
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
(UNAUDITED)
--------------- -------------
JUNE 30, DECEMBER 31,
1997 1996
--------------- -------------
<S> <C> <C>
ASSETS:
Investments:
Fixed maturities:
Held for investment, at amortized cost $ -- $ 87,330
Available for sale, at fair value 3,065,548 2,993,925
Equity securities available for sale, at fair value 13,398 20,867
Trading securities, at fair value -- 31,140
Mortgage loans on real estate 258,344 256,998
Policy loans 146,127 145,976
Short-term investments 83,589 63,113
Other investments 44,285 46,848
--------------- -------------
Total investments 3,611,291 3,646,197
Cash 4,172 39,464
Accrued investment income 47,565 48,643
Accounts and notes receivable 56,622 47,307
Investment in unconsolidated affiliate 147,282 144,652
Present value of insurance in force 325,947 351,973
Deferred policy acquisition costs 305,359 268,356
Costs in excess of net assets acquired 148,841 148,174
Other assets 177,577 138,967
--------------- -------------
Total assets $ 4,824,656 $ 4,833,733
=============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Policy liabilities and accruals $ 3,466,029 $ 3,562,108
Notes payable 270,046 210,325
Income taxes, primarily deferred 74,966 65,036
Other liabilities 152,044 118,401
--------------- -------------
Total liabilities 3,963,085 3,955,870
--------------- -------------
Mandatory redeemable preferred stock:
Series B, $.01 par value, $100 initial redemption value;
authorized, issued and outstanding -0- at June 30, 1997,
and 127,500 at December 31, 1996 -- 14,689
Series C, $.01 par value, $100 initial redemption value;
authorized, issued and outstanding 178,500 at June 30,
1997, and December 31, 1996 19,002 18,175
Shareholders' Equity:
$3.375 Convertible Preferred Stock, $.01 par value, $50
redemption value; authorized issued and outstanding
2,300,000 at June 30, 1997, and December 31, 1996 110,513 110,513
$3.50 Series II Convertible Preferred Stock, $.01 par
value, $50 redemption value; authorized issued and
outstanding 2,875,000 at June 30, 1997, and
December 31, 1996 139,157 139,157
Common stock, $.01 par value; authorized 50,000,000;
issued and outstanding 28,800,631 at June 30, 1997,
and 28,647,714 at December 31, 1996 288 286
Additional paid-in capital 396,651 393,156
Unrealized foreign currency translation losses (16,908) (14,969)
Unrealized gains on securities available for sale 16,062 19,582
Retained earnings 223,115 202,144
Treasury shares (24,809) (3,370)
Notes receivable secured by common stock (1,500) (1,500)
--------------- -------------
Total shareholders' equity 842,569 844,999
--------------- -------------
Total liabilities and shareholders' equity $ 4,824,656 $ 4,833,733
=============== =============
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
<PAGE> 4
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
(UNAUDITED)
<TABLE>
<CAPTION>
--------------------------- ---------------------------
THREE MONTH PERIODS ENDED SIX MONTH PERIODS ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
1997 1996 1997 1996
--------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Premiums, principally accident and sickness $ 62,243 $ 62,759 $ 128,720 $ 127,180
Interest sensitive product policy charges 23,050 22,675 46,276 45,344
Net investment income 68,218 43,081 137,112 84,415
Other income 5,391 865 11,431 827
Net gains from sale of investments 4,706 3,955 8,533 3,428
--------- ---------- ----------- -----------
Total revenues 163,608 133,335 332,072 261,194
--------- ---------- ----------- -----------
BENEFITS AND EXPENSES:
Claims incurred 50,555 45,355 95,210 89,681
Change in liability for future policy benefits and
other policy benefits 23,902 10,251 53,608 21,741
Amortization of present value of insurance in force
and deferred policy acquisition costs 19,611 13,405 38,980 28,264
Amortization of costs in excess of net assets
acquired 3,056 1,650 5,120 3,680
Underwriting and other administrative expenses 30,020 24,237 60,869 47,869
Interest and amortization of deferred debt issuance costs 5,430 4,321 9,817 10,378
Restructuring charge -- -- 19,071 --
--------- ---------- ----------- -----------
Total benefits and expenses 132,574 99,219 282,675 201,613
--------- ---------- ----------- -----------
Income before income taxes, undistributed earnings (losses)
in unconsolidated affiliates and extraordinary charge 31,034 34,116 49,397 59,581
Income taxes 11,268 12,288 19,485 21,918
--------- ---------- ----------- -----------
Net income before undistributed earnings (losses)
in unconsolidated affiliates and extraordinary
charge 19,766 21,828 29,912 37,663
Undistributed earnings (losses)
in unconsolidated affiliates (1,181) 4,089 2,560 8,408
--------- ---------- ----------- -----------
Net Income before extraordinary charge 18,585 25,917 32,472 46,071
Extraordinary charge -- -- -- (816)
--------- ---------- ----------- -----------
Net income 18,585 25,917 32,472 45,255
Preferred stock dividend requirements 4,874 2,709 9,801 5,400
--------- ---------- ----------- -----------
Net income applicable to common stock $ 13,711 $ 23,208 $ 22,671 $ 39,855
========= ========== =========== ===========
PER SHARE INFORMATION:
Primary:
Net income applicable to common stock before
extraordinary charge $ 0.48 $ 0.80 $ 0.78 $ 1.49
Extraordinary charge -- -- -- (0.03)
--------- ---------- ----------- -----------
Net income applicable to common stock $ 0.48 $ 0.80 $ 0.78 $ 1.46
========= ========== =========== ===========
Common shares used in computing primary earnings per share
(in thousands) 28,860 29,139 28,991 27,301
========= ========== =========== ===========
Fully diluted:
Net income applicable to common stock before
extraordinary charge $ 0.48 $ 0.73 $ 0.78 $ 1.37
Extraordinary charge -- -- -- (0.03)
--------- ---------- ----------- -----------
Net income applicable to common stock $ 0.48 $ 0.73 $ 0.78 $ 1.34
========= ========== =========== ===========
Common shares used in computing fully diluted earnings per share
(in thousands) 28,860 34,256 28,991 32,419
========= ========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
<PAGE> 5
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTH PERIODS ENDED JUNE 30,
-------------------------------
1997 1996
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<S> <C> <C>
Net cash provided by operating activities $ 46,710 $ 31,936
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Cash flows from investing activities:
Purchases of invested assets (782,317) (665,393)
Sales of invested assets 663,906 369,328
Maturities of invested assets 123,594 45,515
Other, primarily short term investments, net 16,119 262,413
------------- -------------
Net cash provided by investing activities 21,302 11,863
------------- -------------
Cash flows from financing activities:
Issuance of common stock 3,497 155,759
Treasury stock purchase (21,440) --
Additional borrowings 160,000 20,000
Reduction in notes payable (100,139) (157,000)
Redemption of preferred stock (14,706) --
Dividends on preferred stock and common stock (11,762) (8,186)
Receipts from interest sensitive policies credited to policyholder account
balances 106,379 51,695
Return of policyholder account balances on interest sensitive products (229,378) (117,352)
Other, net 4,245 2,249
------------- -------------
Net cash used by financing activities (103,304) (52,835)
------------- -------------
Decrease in cash (35,292) (9,036)
Cash at beginning of period 39,464 27,778
------------- -------------
Cash at end of period $ 4,172 $ 18,742
============= =============
Supplemental disclosures:
Income taxes paid $ 2,427 $ 3,183
============= =============
Interest paid $ 8,061 $ 9,418
============= =============
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
<PAGE> 6
PENNCORP FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
PennCorp Financial Group. Inc. (the "Company" or "PennCorp") is an
insurance holding company. The Company commenced operations with the acquisition
of Pennsylvania Life Insurance Company ("PLIC") and Executive Fund Life
Insurance Company (which was merged into PLIC effective July 1, 1996) and
Pacific Life and Accident Insurance Company ("PLAIC") on August 23, 1990.
Through its wholly-owned life insurance subsidiaries, PLIC and its wholly-owned
subsidiary, PennCorp Life Insurance Company (collectively referred to as "Penn
Life"), Peninsular Life Insurance Company ("Peninsular"), Professional Insurance
Corporation ("Professional"), Pioneer Security Life Insurance Company ("Pioneer
Security") and its wholly-owned subsidiaries American-Amicable Life Insurance
Company of Texas and Pioneer American Insurance Company (Pioneer Security and
its subsidiaries collectively referred to as "AA Life"), Salem Life Insurance
Corporation ("Salem Life") and its wholly-owned subsidiaries Integon Life
Insurance Corporation ("ILIC"), Georgia International Life Insurance Company
and Occidental Life Insurance Company of North Carolina ("OLIC") (Salem Life and
its wholly-owned subsidiaries collectively referred to as "Integon Life"),
United Life and Annuity Insurance Company ("United Life"), and PLAIC, the
Company offers a broad range of accident and sickness, life, and accumulation
insurance products to individuals through a sales force that is contractually
exclusive to certain of the Company's subsidiaries and through general agents.
The accompanying consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. The accompanying
financial statements reflect all adjustments which are, in the opinion of
management, necessary to a fair statement of the results for the periods
presented. Such adjustments are of a normal and recurring nature. All
significant intercompany accounts and transactions have been eliminated. All
dollar amounts presented hereafter, except share information, are stated in
thousands.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
reported amounts of revenues and expenses during the reporting period. Accounts
that the Company deems to be acutely sensitive to changes in estimates include
deferred policy acquisition costs, future policy benefits, policy and contract
claims and present value of insurance in force. In addition, the Company must
determine requirements for disclosure of contingent assets and liabilities as of
the date of the financial statements based upon estimates. In all instances,
actual results could differ from estimates.
As a result of the Company's decision to exit the private placement
bond sector, the Company transferred all of its remaining assets in the fixed
maturities held for investment portfolio to its fixed maturities available for
sale portfolio as of April 1, 1997. In accordance with Statement of Financial
Accounting Standards ("SFAS") No. 115, the Company marked all assets subject
to the transfer to fair value resulting in a net increase in shareholders'
equity, net of applicable income taxes, of $1.8 million.
<PAGE> 7
(2) PENDING MERGER, ACQUISITION, AND RELATED TRANSACTIONS
On November 25, 1996, the Company and Washington National Corporation
("Washington National") entered into a merger agreement. Under the agreement,
Washington National will merge with PennCorp and each holder of Washington
National common stock will receive common stock of PennCorp, subject to the
right to elect to receive a portion of the merger consideration in cash. The
merger agreement expires by its terms on August 30, 1997.
As of the date of this Form 10-Q, the Company has not yet received clearance
from the Securities and Exchange Commission ("SEC") to release the Joint Proxy
Statement and Prospectus to shareholders of PennCorp and Washington National
for approval of the merger. Accordingly, it is not possible to mail the proxy
statement to the respective shareholders, hold the required special meetings of
stockholders, and complete the merger by August 30, 1997. However, the Company
and Washington National are holding discussions concerning an extension of the
August 30, 1997, expiration date for completion of the merger.
The Company's pending acquisitions of the Controlling Interest in
Southwestern Financial Corporation and Subsidiaries ("SW Financial") and the
Fickes and Stone Knightsbridge Interests, as well as the annual stockholder's
meeting, are also being delayed pending completion of the SEC's Preliminary
Joint Proxy Statement and Prospectus review process relating to those
transactions, including a review of the Company's historical financial
statements.
<PAGE> 8
(3) SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
Through its direct investment in SW Financial, the Company
beneficially owns approximately 78.0% of the economic interest in SW Financial.
Financial information for SW Financial is provided below.
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, 1997 DECEMBER 31, 1996
------------- -----------------
(unaudited)
<S> <C> <C>
ASSETS:
Invested assets $ 1,623,291 $ 1,640,991
Insurance assets 109,631 107,230
Other assets 435,263 462,329
------------ ------------
Total assets $ 2,168,185 $ 2,210,550
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities $ 1,727,559 $ 1,745,160
Long-term debt 157,250 159,750
Other liabilities 102,263 127,237
Mandatory redeemable preferred
stock 35,351 33,879
Shareholders' equity 145,762 144,524
------------ ------------
Total liabilities and
shareholders' equity $ 2,168,185 $ 2,210,550
============ ============
</TABLE>
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTH PERIODS ENDED SIX MONTH PERIODS ENDED
---------------------------------- ----------------------------------
JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1997 JUNE 30, 1996
--------------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
REVENUES:
Policy revenues $ 36,118 $ 62,108 $ 73,618 $ 124,816
Net investment income 31,488 31,703 63,585 64,723
Net gains (losses) from sale of
investments 535 (520) 550 (9)
Other income 5,514 3,851 11,698 7,515
------------ ------------ ------------ ------------
Total revenues 73,655 97,142 149,451 197,045
------------ ------------ ------------ ------------
BENEFITS AND EXPENSES:
Policyholder benefits 54,960 63,459 100,242 128,389
Amortization 5,890 5,976 11,937 12,015
Underwriting and other
administrative expenses 10,234 14,683 21,812 29,790
Interest and related debt costs 3,444 3,435 6,880 7,010
------------ ------------ ------------ ------------
Total benefits and expenses 74,528 87,553 140,871 177,204
------------ ------------ ------------ ------------
Income (loss) before income taxes (873) 9,589 8,580 19,841
Income taxes 200 3,442 3,924 7,254
------------ ------------ ------------ ------------
Net income (loss) (1,073) 6,147 4,656 12,587
Preferred stock dividend
requirements 744 680 1,472 1,347
------------ ------------ ------------ ------------
Net income (loss) applicable to common
stock $ (1,817) $ 5,467 $ 3,184 $ 11,240
============ ============ ============ ============
</TABLE>
<PAGE> 9
(4) RESTRUCTURING CHARGE
As a result of the initiative to implement an operating division
structure, the Company recorded a cumulative pre-tax restructuring charge of
$19.1 million during the three month period ended March 31, 1997.
For the three month and six month periods ended June 30, 1997, $2.1
million and $2.4 million, respectively, of severance and related benefits as
well as holding costs of vacated facilities have been charged against the
restructuring accrual.
The Company estimates approximately $1.6 million and $3.6 million of
pre-tax incremental costs associated with the restructuring were incurred during
the three month and six month periods ended June 30, 1997, respectively, and
included in the Company's results of operations.
(5) REDEMPTION OF PREFERRED STOCK, CERTAIN EQUITY TRANSACTIONS AND EARNINGS
PER SHARE
On March 15, 1997, the Company redeemed all of the previously
outstanding Series B mandatory redeemable preferred stock at its stated
redemption value of $14.7 million.
During the six month period ended June 30, 1997, certain employees and
agents exercised stock options and warrants resulting in the issuance of
164,644 shares of the Company's Common Stock. The result of such exercises
was to increase common stock and additional paid in capital by $1,646 and
$3.5 million, respectively.
On January 11, 1997, the Company repurchased 100,000 shares of the
Company's Common Stock for an aggregate purchase price of $35.38 per share
resulting in a $3.5 million increase in the value of treasury shares held.
Effective February 12, 1997, the Company purchased from United
Companies Financial Corporation ("UCFC"), the former parent of United Life,
483,839 shares of the Company's Common Stock for an aggregate purchase price of
$17.9 million plus accrued interest through the closing date, June 9, 1997, of
$295,000. The value of treasury shares held increased $17.9 million as a result
of this transaction.
During the three month and six month periods ended June 30, 1997,
certain common stock equivalents were antidilutive in the aggregate. As a
result, for such periods, primary earnings per common share and fully diluted
earnings per common share amounts are equivalent.
<PAGE> 10
(6) NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 128, "Earnings Per Share" ("SFAS No. 128"). SFAS No. 128
supersedes and simplifies the existing computation, presentation and disclosure
requirements for earnings per share outlined under Accounting Principles Board
Opinion No. 15, "Earnings Per Share".
SFAS No. 128 is effective for both interim and annual financial
statements issued after December 15, 1997. At that time, the Company will be
required to change the method currently used to compute earnings per share and
restate all prior periods presented. Earlier application is not permitted,
however disclosure of pro forma earnings per share amounts computed utilizing
the standards established by SFAS No. 128 is permitted in the notes to the
financial statements for periods ending prior to the effective date. Pro forma
earnings per share for the three month and six month periods ended June 30,
1997 and 1996, are as follows:
<TABLE>
<CAPTION>
Three month period ended Six month period ended
----------------------------- -----------------------------
June 30, 1997 June 30, 1996 June 30, 1997 June 30, 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Basic $0.49 $0.83 $0.80 $1.56
===== ===== ===== =====
Diluted $0.46 $0.73 $0.77 $1.34
===== ===== ===== =====
</TABLE>
In March 1997, the FASB issued Financial Accounting Standards No. 129,
"Disclosures of Information About Capital Structure" ("SFAS No. 129"). SFAS No.
129 is effective for both interim and annual financial statements issued after
December 15, 1997, and clarifies the disclosure requirements related to the
type, and nature, of securities contained within the Company's capital
structure. The Company anticipates no changes to present disclosures will be
required under SFAS No. 129.
The FASB issued SFAS No. 130, "Reporting Comprehensive Income", in June
1997. SFAS No. 130 is effective for annual and interim periods ending after
December 15, 1997, although early adoption is permitted. This statement
establishes standards for reporting and displaying comprehensive income and its
components and requires all items to be recognized under accounting standards
as comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements. Examples of items that
will be included in the Company's presentation of comprehensive income, in
addition to net income, are unrealized foreign currency translation gains and
losses as well as unrealized gains and losses on securities available for sale.
The Company is currently evaluating the necessary changes to its disclosures.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", was also issued in June 1997 and is effective for annual and
interim periods ending after December 31, 1997, although early adoption is
permitted. This statement establishes standards for the methodology public
entities use to report information about operating segments in annual financial
statements and selected information about operating segments in interim
financial reports issued to shareholders. Operating segments are components of
an enterprise about which separate operating information is available and is
periodically evaluated by management. The statement requires that companies
disclose operating segment data on the same basis utilized internally for
evaluating segment performance and determining the allocation of corporate
resources. Disclosure requirements include operating segment profit or loss,
certain specific revenue and expense items, operating segment assets, as well
as various reconciliations of total operating segment information to amounts in
the consolidated financial statements. The Company is currently evaluating the
appropriate disclosure changes in conjunction with the implementation of the
operating division structure initiated in the first quarter of 1997.
<PAGE> 11
REVIEW BY INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The June 30, 1997 and 1996, financial statements included in this filing
have been reviewed by KPMG Peat Marwick LLP, independent certified public
accountants, in accordance with established professional standards and
procedures for such a review.
The report of KPMG Peat Marwick LLP commenting upon their review is
included on page 12.
[REST OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 12
Independent Auditors' Review Report
The Board of Directors and Shareholders
PennCorp Financial Group, Inc.
We have reviewed the accompanying consolidated condensed balance sheet of
PennCorp Financial Group, Inc. and subsidiaries as of June 30, 1997, the
consolidated condensed statements of income for the three and six-month periods
ended June 30, 1997 and 1996, and the consolidated condensed statements of cash
flows for the six-month periods ended June 30, 1997 and 1996. These financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of PennCorp Financial Group, Inc. as
of December 31, 1996 and the related consolidated statements of income,
shareholders' equity, and cash flows for the year then ended (not presented
herein); and in our report dated February 28, 1997, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
financial information set forth in the accompanying consolidated condensed
balance sheet as of December 31, 1996 is fairly presented, in all material
respects, in relation to the consolidated balance sheet from which it has been
derived.
KPMG PEAT MARWICK LLP
August 19, 1997
Raleigh, North Carolina
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
This "Management's Discussion and Analysis of Financial Condition and
Results of Operations" should be read in conjunction with the comparable
discussion filed with the Company's annual filings with the SEC on Form 10-K
and Form 10-K/A Amendment Nos. 1 and 2 for the fiscal year ended December 31,
1996.
The following discussion should be read in conjunction with the
consolidated condensed financial statements and related notes of this Quarterly
Report on Form 10-Q.
Cautionary Statement for purposes of the Safe Harbor Provisions of the
Private Securities Litigation Reform Act of 1995. The statements below that
relate to future plans, events or performances are forward-looking statements
that involve a number of risks or uncertainties. Among those items that could
adversely affect the Company's financial condition, results of operations and
cash flows are the following: changes in regulations affecting insurance
companies, interest rates, the federal income tax code (to the extent the
Company's product mix includes tax deferred accumulation products), the ratings
assigned to the Company's insurance subsidiaries by independent rating
organizations such as A.M. Best (which the Company believes are particularly
important to the sale of annuity and other accumulation products) and
unanticipated litigation. There can be no assurance that other factors not
currently anticipated by management will not also materially and adversely
affect the Company's results of operations.
GENERAL
PennCorp Financial Group, Inc. (the "Company", or "PennCorp"), through
its operating subsidiaries, is a low cost provider of accumulation, life, and
fixed benefit accident and sickness insurance products throughout the United
States and Canada. The Company's products are sold through several distribution
channels, including exclusive agents, general agents, financial institutions,
and payroll deduction programs, and are targeted primarily to lower and
middle-income individuals in rural and suburban areas. These products are
primarily small premium accident and sickness insurance policies with defined
fixed benefit amounts, traditional whole life and universal life insurance with
low face amounts and accumulation products such as single premium deferred
annuities.
The Company's financial condition and results of operations for the
periods covered by this and future "Management's Discussion and Analysis of
Financial Condition and Results of Operations" are or will be affected by
several common factors, each of which is discussed below.
Restructuring Charges. As a result of the tremendous growth the Company
has experienced, the diversification of the underlying business units resulting
from acquisitions over time and the need for the Company to be able to rapidly
integrate future acquisitions, the Company began a strategic business
evaluation during the third quarter of 1996. During the period ended March 31,
1997, the Company completed its review of its existing business units and
commenced a plan to establish five operating divisions: Career Sales,
Individual Sales, Financial Services, Payroll Sales, and Other Insurance. The
Company thoughtfully considered the impact the pending merger with Washington
National Corporation and the acquisition of the controlling interest in
S W Financial may have on the divisional structure. However, certain portions of
the Company's restructuring plan will not be definitive until the consummation
of the pending merger, acquisition and related transactions. As a result, it is
probable that the Company will incur certain additional restructuring charges as
the final determination of the time of consummation of the merger with
Washington National Corporation and the acquisition of the controlling interest
in S W Financial are known.
As a result of the initiative to implement an operating division
structure, the Company recorded a cumulative pre-tax restructuring charge of
$19,071 during the three month period ended March 31, 1997.
For the three month and six month periods ended June 30, 1997, $2.1
million and $2.4 million, respectively, of severance and related benefits as
well as holding costs of vacated facilities have been charged against the
restructuring accrual.
The Company estimates approximately $1.6 million and $3.6 million of
pre-tax incremental costs associated with the restructuring were incurred
during the three month and six month periods ended June 30, 1997, respectively,
and included in the Company's results of operations.
<PAGE> 14
The following tables reflect pro forma results of operations
eliminating the impact of the restructuring costs incurred by the Company for
the three month and six month periods ended June 30, 1997:
<TABLE>
<CAPTION>
Three month
Three month period ended period ended
June 30, 1997 June 30, 1996
--------------------------------------------------------- -------------
Restructuring
As Reported Costs As Reported (net) As Reported
----------- ------------- ----------------- -------------
<S> <C> <C> <C> <C>
Operating Information:
----------- ----------------- -------------
Total revenues: $163,608 $163,608 $133,335
----------- ----------------- -------------
Benefits and expenses:
Claims incurred 50,555 -- 50,555 45,355
Change in liability for
future policy benefits and other
policy benefits 23,902 -- 23,902 10,251
Amortization of present value of
insurance in force and deferred
policy acquisition costs 19,611 -- 19,611 13,405
Amortization of costs in excess of
net assets acquired 3,056 -- 3,056 1,650
Underwriting and other administrative
expenses 30,020 1,595 28,425 24,237
Interest and amortization of deferred
debt issuance costs 5,430 -- 5,430 4,321
Restructuring charge -- -- -- --
----------- ----------------- -------------
Total benefits and expenses 132,574 130,979 99,219
----------- ----------------- -------------
Income before income taxes,
undistributed earnings (losses) in
unconsolidated affiliates and
extraordinary charge 31,034 32,629 34,116
Income taxes 11,268 11,843 12,288
----------- ----------------- -------------
Net income before undistributed
earnings (losses) in unconsolidated
affiliates and extraordinary charge 19,766 20,786 21,828
Undistributed earnings (losses)
in unconsolidated affiliates (1,181) -- (1,181) 4,089
----------- ----------------- -------------
Net income before extraordinary charge 18,585 19,605 25,917
Extraordinary charge -- -- -- --
----------- ----------------- -------------
Net income 18,585 19,605 25,917
Preferred stock dividend
requirements 4,874 -- 4,874 2,709
----------- ----------------- -------------
Net income applicable to common stock $13,711 $14,731 $23,208
=========== ================= =============
Per Share Information:
Primary:
Net income applicable to common
stock before extraordinary
charge $0.48 $0.51 $0.80
Extraordinary charge -- -- --
----------- ----------------- -------------
Net income applicable to
common stock $0.48 $0.51 $0.80
=========== ================= =============
Weighted average primary
shares outstanding (in
thousands) 28,860 28,860 29,139
=========== ================= =============
Fully diluted:
Net income applicable to
common stock before extra-
ordinary charge $0.48 $0.50 $0.73
Extraordinary charge -- -- --
----------- ----------------- -------------
Net income applicable to
common stock $0.48 $0.50 $0.73
=========== ================= =============
Weighted average fully diluted
shares outstanding (in
thousands) 28,860 38,203 34,256
=========== ================= =============
</TABLE>
<PAGE> 15
<TABLE>
<CAPTION>
Six month
Six month period ended period ended
June 30, 1997 June 30, 1996
--------------------------------------------------------- -------------
Restructuring
As Reported Costs As Reported (net) As Reported
----------- ------------- ----------------- -------------
<S> <C> <C> <C> <C>
Operating Information:
----------- ----------------- -------------
Total revenues: $332,072 $332,072 $261,194
----------- ----------------- -------------
Benefits and expenses:
Claims incurred 95,210 -- 95,210 89,681
Change in liability for
future policy benefits and other
policy benefits 53,608 -- 53,608 21,741
Amortization of present value of
insurance in force and deferred
policy acquisition costs 38,980 -- 38,980 28,264
Amortization of costs in excess of
net assets acquired 5,120 -- 5,120 3,680
Underwriting and other administrative
expenses 60,869 3,576 57,293 47,869
Interest and amortization of deferred
debt issuance costs 9,817 -- 9,817 10,378
Restructuring charge 19,071 19,071 -- --
----------- ----------------- -------------
Total benefits and expenses 282,675 260,028 201,613
----------- ----------------- -------------
Income before income taxes,
undistributed earnings in
unconsolidated affiliates and
extraordinary charge 49,397 72,044 59,581
Income taxes 19,485 26,361 21,918
----------- ----------------- -------------
Net income before undistributed
earnings in unconsolidated affiliates
and extraordinary charge 29,912 45,683 37,663
Undistributed earnings in
unconsolidated affiliates 2,560 -- 2,560 8,408
----------- ----------------- -------------
Net income before extraordinary charge 32,472 48,243 46,071
Extraordinary charge -- -- -- (816)
----------- ----------------- -------------
Net income 32,472 48,243 45,255
Preferred stock dividend
requirements 9,801 -- 9,801 5,400
----------- ----------------- -------------
Net income applicable to common stock $22,671 $38,442 $39,855
=========== ================= =============
Per Share Information:
Primary:
Net income applicable to common
stock before extraordinary
charge $0.78 $1.33 $1.49
Extraordinary charge -- -- (0.03)
----------- ----------------- -------------
Net income applicable to
common stock $0.78 $1.33 $1.46
=========== ================= =============
Weighted average primary
shares outstanding (in
thousands) 28,991 28,991 27,301
=========== ================= =============
Fully diluted:
Net income applicable to
common stock before extra-
ordinary charge $0.78 $1.24 $1.37
Extraordinary charge -- -- (0.03)
----------- ----------------- -------------
Net income applicable to
common stock $0.78 $1.24 $1.34
=========== ================= =============
Weighted average fully diluted
shares outstanding (in
thousands) 28,991 38,303 32,419
=========== ================= =============
</TABLE>
<PAGE> 16
ONGOING BUSINESS EVALUATION. As part of the strategic business
evaluation which resulted in the Company's divisional restructuring, the
Company reviewed each of the operating companies and the impact of those
operating companies on PennCorp's current and long-term profitability
potential, the ability of the operating companies to absorb operations related
to future acquisitions and the market focus of the operating companies.
PennCorp's evaluation is ongoing and considers the possibility of potential
divestitures of certain of its operating subsidiaries which no longer fit into
the strategic business plan.
Preacquisition Contingencies and Allocations. In June 1997, the Company
settled various outstanding contingencies arising out of the purchase of United
Life with its former owner (UCFC). As a result of such settlement, UCFC will
repurchase certain residential mortgage loans originated by UCFC and currently
warehoused by United Life upon the occurrence of foreclosure on the underlying
property. Under terms of the arrangement, UCFC will repurchase the foreclosed
properties for the full value of the underlying principal and accrued interest.
As a result of such settlement, loan loss provisions on loans subject to this
agreement aggregating $8.5 million have been eliminated resulting in a
corresponding reduction of $5.5 million (net of deferred taxes of $3.0 million)
in costs in excess of net assets acquired.
In addition, as part of the settlement the Company repurchased 483,839
shares of PennCorp Common Stock held by UCFC for $17.9 million.
During the six month period ended June 30, 1997, the Company corrected
an immaterial balance sheet classification error which was originally recorded
as part of the purchase transaction associated with Professional. Such
reclassification had no impact on the Company's results of operations for the
periods presented.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Liquidity. The Company's liquidity requirements are funded primarily by
its insurance subsidiaries. The insurance subsidiaries' principal sources of
cash are premiums and investment income. The insurance subsidiaries'
primary uses of cash are policy claims, commissions, operating expenses, income
taxes and payments to the Company for principal and interest due under surplus
debentures, tax sharing payments and dividends. Both sources and uses of cash
are reasonably predictable.
During the six month period ended June 30, 1997 the Company received
$21.2 million in interest payments or dividends from its subsidiaries and paid
$8.1 million, $8.9 million and $2.8 million in interest and preferred stock and
common stock dividends, respectively. For the remainder of 1997, the Company
believes that it may need to utilize funds available under its revolving
credit facility to fund a modest shortfall in available cash. For periods
beginning in 1998, under current statutory limitations, the Company believes
that it will receive sufficient cash flow from its subsidiaries to satisfy its
cash requirements. As a result of the Company's decision to retain capital and
surplus at the insurance subsidiary level, and with the realignment of the
insurance subsidiaries into operating divisions, the Company believes that its
insurance subsidiaries have excess capital and surplus. The Company's own
established targets for estimated risk-based capital requirements indicate
that the insurance divisions could make available approximately $50.0 million
to $60.0 million to PennCorp, subject to applicable regulatory approvals.
<PAGE> 17
Cash Flow. During the six-month period ended June 30, 1997, cash
provided by operations was $46.7 million compared to $31.9 million for the
six month period ended June 30, 1996. United Life provided $45.2 million in
1997, consisting primarily of investment income. Excluding United Life for the
six month period of 1997, cash flow from operations declined by $30.4 million
when compared to the six month period ended June 30, 1996. This decline was
primarily the result of payments associated with restructuring costs and higher
claim payments during the period as compared to the six month period ended June
30, 1996.
Pending Merger, Acquisition, and Related Transactions. On November 25,
1996, the Company and Washington National entered into a merger agreement. Under
the agreement, Washington National will merge with PennCorp and each holder of
Washington National common stock will receive common stock of PennCorp, subject
to the right to elect to receive a portion of the merger consideration in cash.
The merger agreement expires by its terms on August 30, 1997.
As of the date of this Form 10-Q, the Company has not yet received
clearance from the SEC to release the Joint Proxy Statement and Prospectus to
shareholders of PennCorp and Washington National for approval of the merger.
Accordingly, it is not possible to mail the proxy statement to the respective
shareholders, hold the required special meetings of stockholders, and complete
the merger by August 30, 1997. However, the Company and Washington National are
holding discussions concerning an extension of the August 30, 1997, expiration
date for completion of the merger.
The Company's pending acquisitions of the Controlling Interest in
SW Financial and Fickes and Stone Knightsbridge Interests, as well as the
annual stockholder's meeting, are also being delayed pending completion of the
SEC's Preliminary Joint Proxy Statement and Prospectus review process relating
to those transactions, including a review of the Company's historical financial
statements.
<PAGE> 18
RESULTS OF OPERATIONS
Policy Revenue. Total policy revenue for the six-month period ended
June 30, 1997, increased 1.4% to $175.0 million from $172.5 million for the
comparable period ended June 30, 1996. Life product revenue increased $2.9
million as a result of the inclusion of United Life which added $4.1 of
additional life revenue while fixed benefit accident and sickness product
revenue declined modestly. The decline in policy revenue from accident and
sickness products was primarily attributable to the Company's decision during
1995 to discontinue new business production of certain disability income
products. Policy revenue from foreign operations (primarily Canada) increased
7.1% or approximately $1.5 million. Policy revenue expressed in Canadian
dollars increased 7.6% or $2.1 million (Canadian).
For the three month period ended June 30, 1997, total policy revenues
were relatively constant at $85.3 million compared to $85.4 million for the
three-month period ended June 30, 1996. For the three month period ended June
30, 1997, United Life added $2.0 million of policy revenues. Policy revenues
from fixed benefit products offset the increases in life products as policy
revenues from Penn Life and Professional declined $1.4 million.
Net Investment Income. Net investment income for the six months ended
June 30, 1997, was $137.1 million compared to $84.4 million for the six months
ended June 30, 1996. Of the $52.7 million increase in investment income, $56.0
million of the increase was attributable to the addition of United Life.
Offsetting the increase as a result of the United Life acquisition was the loss
of investment income from Integon Life of $4.9 million as the result of the
liquidation of assets resulting from surrenders on a closed block of
accumulation products. In the aggregate, the Company liquidated $123.0 million
of assets to fund surrender activity. Yield based upon weighted average amount
of invested assets outstanding each period was approximately 7.5% and 7.6% for
the six month periods ended June 30, 1997 and 1996, respectively.
Net investment income for the three-month period ending June 30, 1997,
increased substantially to $68.2 million from $43.1 million for the comparable
period in 1996. Nearly all the increase was attributable to United Life which
positively impacted investment income by $28.0 million.
<PAGE> 19
Offsetting the impact of United Life were declines in Integon Life
investment income of $3.9 million. In addition, slightly higher yields on the
portfolio, excluding United Life, which increased to 7.7% from 7.3% resulting
in approximately $1.4 million of additional investment income for the three
month period ended June 30, 1997, compared to the three month period ended
June 30, 1996.
Other income. Included in other income for the three month and six month
periods ended June 30, 1997, was income resulting from the Company's bank
marketing distribution channel, Marketing One. Such revenue amounted to $4.9
million and $10.1 million for the three month and six month periods ended June
30, 1997. Prior to October 1, 1996, Marketing One was carried on the cost method
and hence, was not consolidated in the Company's financial statements.
In conjunction with the Company's acquisition and investment activities,
management is regularly presented with investment opportunities to invest in
substantially undervalued securities in corporations which will likely
undertake some form of restructuring. In 1995, the Company established a
trading security account for such investments. Included in other income for the
six and three month periods ended June 30, 1996, are gains and (losses) of
($219,000) and $295,000 resulting from such activities. The Company
substantially liquidated its trading portfolio during 1997 and had no gains or
losses associated with the liquidation.
Gains on the Sale of Investments. During the six month period ended June
30, 1997, the Company realized investment gains of approximately $8.5 million as
the result of the Company liquidating certain sectors of its equity security and
private placement bond portfolios. As a result of including gains on assets
backing interest sensitive liabilities in gross profit margin calculations, the
Company accelerated the amortization of the present value of insurance in force
and deferred acquisition costs in the aggregated by $1.9 million during the six
month period ended June 30, 1997. During the six month period ended June 30,
1996, the Company realized investment gains of $3.4 million.
For the three month period ended June 30, 1997, the Company realized
investment gains of $4.7 million primarily as the result of sales of equity
securities and certain real estate holdings. During the three month period
ended June 30, 1996, the Company realized approximately $4.0 million of
realized gains.
Claims Incurred. Claims incurred for the six month period ended June 30,
1997 increased 6.1% to $95.2 million from $89.7 million for the six-month period
ended June 30, 1996. The inclusion of United Life resulted in $3.9 million of
additional claims. In addition, OLIC life claims increased $3.0 million and
fixed benefit product claims increased $700,000 during the first six months of
1997 when compared to the first six months of 1996. Although OLIC continues to
incur higher life claims than historical averages, the Company does not believe
that current claim patterns indicate permanent adverse mortality, but rather a
short term elevation in the incidence of mortality. During the period, OLIC
ceased actively underwriting new business. Integon Life claims declined $2.6
million for the six month period ended June 30, 1997, when compared to the
comparable period for 1996. During 1996, Integon Life realized higher than
anticipated mortality primarily as a result of business underwritten during the
two year period prior to acquisition by PennCorp.
<PAGE> 20
For the three month period ended June 30, 1997, claims incurred
increased 11.5% to $50.6 million from $45.4 million for the comparable period in
1996. As noted above, the increase in claims was primarily the result of United
Life, $1.8 million and OLIC, $1.9 million. Other modest increases in incurred
claims for Professional and Penn Life partially offset by a decline in Integon
Life incurred claims of $1.5 million accounted for the remainder of the
increase.
Underwriting and Other Administrative Expenses. Excluding the impact of
the restructuring charges incurred during the six month period ended June 30,
1997, underwriting and other administrative expenses increased 18.3% to $56.6
million from $47.9 million for the six-month period ended June 30, 1996. The
increase is primarily attributable to the inclusion of $10.1 million and $5.6
million of expenses as a result of the consolidation of Marketing One and the
acquisition of United Life, respectively. Offsetting the increases was a decline
in the Company's Raleigh-based operations expense structure of $9.2 million. The
decline is a result of the savings emerging from the restructuring of
Professional, OLIC and Integon Life.
Excluding the impact of the restructuring charges, underwriting and
other administrative expenses increased by $3.5 million to $27.7 million for
the three month period ended June 30, 1997, when compared to $24.2 million for
the same period of 1996. Approximately $5.1 million and $3.1 million was
attributable to Marketing One and United Life, respectively. Offsetting the
increases was a decline in the Company's Raleigh-based operations expense
structure of $6.4 million. As stated above, the decline is the result of the
savings emerging from the divisional restructuring. In addition, during the
three month period ended June 30, 1997, certain non-insurance subsidiaries
incurred additional expenses of approximately $1.8 million primarily associated
with administrative systems conversion costs.
Interest and Related Debt Costs. For the six-month period ended June 30,
1997, interest and amortization of deferred debt issuance costs decreased to
$9.8 million from $10.4 million for the comparable 1996 period. This decrease
was the result of the Company eliminating subsidiary indebtedness which carried
significantly higher cost of funds than credit facility borrowings available to
the Company at the parent company level. In addition, the Company utilized
funds available under its revolving credit facility to repurchase approximately
$35 million of its 9 1/4% Senior Subordinated Notes due 2003 (the "Notes")
resulting in a positive interest arbitrage of approximately 180 basis points.
The actions noted above result in the Company realizing approximately $345,000
in interest cost savings. During the six month period ended June 30, 1996, the
Company had weighted average borrowings of $8.5 million more than the
comparable period ended June 30, 1997. Such additional borrowings resulted in
additional interest costs of $255,000.
<PAGE> 21
For the three month period ended June 30, 1997 and 1996, interest
costs were $5.4 million and $4.3 million respectively. The increase in costs as
a result of the increase in average borrowings outstanding amounted to
approximately $836,000. In addition, as a result of the final settlement of
contingencies arising out of the acquisition of United Life, the Company
incurred $295,000 of interest costs during the settlement period prior to the
repurchase of the Company's Common Stock held by UCFC. Also impacting interest
costs were the subsidiary refinancings and the repurchase of the $35 million of
Notes which resulted in an aggregate decline of $160,000 in interest costs.
Income Taxes. The effective tax rates for the three month and six
month periods ended June 30, 1997, were approximately 36.4% and 39.6%,
respectively, compared to 35.8% and 36.8% for the three month and six month
periods ended June 30, 1996, respectively. Excluding the impact of $19.1 million
of restructuring charges as well as incremental costs associated with the
restructuring of $3.6 million, which combined derive an income tax benefit of
$5.8 million, the Company's effective tax rate would have been 36.6% for the six
month period ended June 30, 1997. The effective rate for all periods presented
is higher than the statutory tax rate primarily due to the non-deductibility of
the amortization of costs in excess of net assets acquired.
Equity in Undistributed Earnings of Unconsolidated Affiliates. For the
six month periods ended June 30, 1997 and 1996, the Company recognized $2.6
million and $8.4 million of earnings as a result of its economic interest in SW
Financial. The significant decline in the results of operations of SW
Financial was primarily related to losses suffered on certain health lines of
business aggregating $10.0 million. In addition, for the six month period ended
June 30, 1997, SW Financial's operating results were negatively impacted by
$1.3 million and $1.1 million due to increased goodwill amortization as a
result of final purchase allocations made during 1996 and lost investment
income resulting from declining reinvestment rates, respectively.
For the three month periods ended June 30, the Company recognized a
loss of $1.2 million compared with $4.1 million of income from SW Financial for
1997 and 1996, respectively. Three month variances trend with six month
variances as SW Financial primarily realized the impacts described above during
the three month period ended June 30, 1997.
SW Financial continues to monitor emerging losses on certain of its
health products and anticipates that it will likely incur additional losses for
the remainder of 1997. Management of SW Financial is currently evaluating
various action plans with respect to this business in order to mitigate the
emerging loss experience. In addition, SW Financial intends to continue to
implement its action plan to reduce losses on certain interest sensitive
product portfolios and closely monitor the impact of such actions relative to
anticipated results. The Company believes that such action will likely
positively impact the SW Financials' results of operations as a result of a
reduction in future policy benefits of approximately $20.0 million during the
remainder of 1997.
Pro forma Analysis of the Results of Operations. The following pro
forma results of operations has been prepared to aid in comparative analysis of
the six month periods ended June 30, 1997 and 1996. The pro forma results
indicated below eliminate the impact of the restructuring charge and
additionally eliminate the impact of certain losses and non-comparative charges
associated with the Company's economic interest in SW Financial. Also, included
in the following pro forma statement of operations is the reclassification of
amortization of the present value of insurance in force and deferred
acquisition costs associated with gains on invested assets during the six month
period ended June 30, 1997. The Company did not "unlock" amortization of the
present value of insurance in force or deferred acquisition costs during 1996
for realized investment gains.
<PAGE> 22
<TABLE>
<CAPTION>
Six month period ended Six month period ended
June 30, 1997 June 30, 1996
----------------------------------------------------------------------- ----------------------
Restructuring As Reported Comparative Comparative
As Reported Costs (net) Adjustments Pro Forma As Reported
----------- ------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
OPERATING INFORMATION:
Revenues:
Premiums, principally
accident and sickness $ 128,720 -- $ 128,720 -- $ 128,720 $ 127,180
Interest sensitive product
policy charges 46,276 -- 46,276 -- 46,276 45,344
Net investment income 137,112 -- 137,112 -- 137,112 84,415
Other income 11,431 -- 11,431 -- 11,431 827
Net gains from sale of
investments 8,533 -- 8,533 1,902 6,631 3,428
----------- ----------- ----------- -----------
Total revenues 332,072 332,072 330,170 261,194
----------- ----------- ----------- -----------
Benefits and expenses:
Claims incurred 95,210 -- 95,210 -- 95,210 89,681
Change in liability for
future policy benefits
and other policy benefits 53,608 -- 53,608 -- 53,608 21,741
Amortization of present value
of insurance in force and
deferred policy acquisition
costs 38,980 -- 38,980 1,902 37,078 28,264
Amortization of costs in
excess of net assets
acquired 5,120 -- 5,120 -- 5,120 3,680
Underwriting and other
administrative expenses 60,869 3,576 57,293 -- 57,293 47,869
Interest and amortization of
deferred debt issuance costs 9,817 -- 9,817 -- 9,817 10,378
Restructuring charge 19,071 19,071 -- -- -- --
----------- ----------- ----------- -----------
Total benefits and
expenses 282,675 260,028 258,126 201,613
----------- ----------- ----------- -----------
Income before income taxes,
undistributed earnings in
unconsolidated affiliates
and extraordinary charge 49,397 72,044 72,044 59,581
Income taxes 19,485 26,361 26,361 21,918
----------- ----------- ----------- -----------
Net income before undistributed
earnings in unconsolidated
affiliates and extraordinary
charge 29,912 45,683 45,683 37,663
Undistributed earnings
in unconsolidated
affiliates 2,560 -- 2,560 7,084 9,644 8,408
----------- ----------- ----------- -----------
Net income before
extraordinary charge 32,472 48,243 55,327 46,071
Extraordinary charge -- -- -- -- -- (816)
----------- ----------- ----------- -----------
Net income 32,472 48,243 55,327 45,255
Preferred stock dividend
requirements 9,801 -- 9,801 -- 9,801 5,400
----------- ----------- ----------- -----------
Net income applicable to
common stock $ 22,671 $ 38,442 $ 45,526 $ 39,855
=========== =========== =========== ===========
PER SHARE INFORMATION:
Primary:
Net income applicable to
common stock before
extraordinary charge $ 0.78 $ 1.33 $ 1.57 $ 1.49
Extraordinary charge -- -- -- (0.03)
----------- ----------- ----------- -----------
Net income applicable to
common stock $ 0.78 $ 1.33 $ 1.57 $ 1.46
=========== =========== =========== ===========
Weighted average primary
shares outstanding
(in thousands) 28,991 28,991 28,991 27,301
=========== =========== =========== ===========
Fully diluted:
Net income applicable to
common stock before
extraordinary charge $ 0.78 $ 1.24 $ 1.42 $ 1.37
Extraordinary charge -- -- -- (0.03)
----------- ----------- ----------- -----------
Net income applicable to
common stock $ 0.78 $ 1.24 $ 1.42 $ 1.34
=========== =========== =========== ===========
Weighted average fully
diluted shares outstanding
(in thousands) 28,991 38,303 38,303 32,419
=========== =========== =========== ===========
</TABLE>
<PAGE> 23
During the period SW Financial incurred losses aggregating
approximately $10.0 million as the result of additional analysis on certain
health insurance lines of business. SW Financial anticipates that it may incur
additional losses for the remainder of 1997 on the health line of business
until its policy conversion and rate increase program is fully implemented.
During the period ended June 30, 1997, SW Financial increased, by $2.1 million,
benefit reserves on interest sensitive policies above such amounts for the
comparative period ended June 30, 1996. As the result of the initiation of a
management action plan associated with this block of business, it is highly
unlikely that such reserves will be neccessary to cover future losses. In
addition, SW Financial incurred $1.3 million of additional goodwill
amortization during the six month period ended June 30, 1997, as compared to
June 30, 1996. Such amortization was the result of final purchase allocations
by SW Financial. The aggregate impact of such items was to reduce SW
Financial's income from operations by $13.4 million resulting in the Company's
results of operations being negatively impacted by $7.1 million.
<PAGE> 24
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a party to various pending or threatened legal actions
arising in the ordinary course of business some of which include allegations of
insufficient policy illustration and agent misrepresentations. Although the
outcome of such actions is not presently determinable, management does not
believe that such matters, individually or in the aggregate, would have a
material adverse effect on the Company's financial position or results of
operations if resolved against the Company.
ITEM 5. OTHER INFORMATION
Securities and Exchange Commission ("SEC") Review of Historical
Financial Statements
As part of the Preliminary Joint Proxy Statement and Prospectus review
process related to the pending merger with Washington National Corporation and
the acquisitions of the controlling interest in SW Financial and the Fickes and
Stone Knightsbridge Interests, the SEC has been reviewing the Company's
historical financial statements.
Due to the nature of the accounting comments raised by the SEC, the
Company commenced a thorough review of its historical accounting policies and
practices, conducted under the supervision of the Audit Committee of the Board
of Directors and with the assistance of the Company's internal audit staff and
KPMG Peat Marwick LLP ("KPMG"), the Company's independent auditors. Based upon
that review, the Company and KPMG reconfirmed that, notwithstanding certain
accounting errors identified by the Company during the review process, the
Company's financial statements were fairly presented for all periods under
review. The Company advised the SEC of the results of its review at the end of
June 1997, and subsequently provided additional information requested by the
SEC.
On August 14, 1997, the SEC notified the Company that it was unable to
concur with certain of the Company's conclusions. The SEC requested that the
Company correct its financial statements to eliminate the accounting errors
identified during the Company's internal review and to revise its historical
financial statements in certain other respects.
The Company is continuing to evaluate the August 14, 1997,
correspondence and subsequent conversations with the SEC, and is working to
resolve these matters as quickly as possible, which is likely to include
revisions to the Company's historical financial statements.
Pending Merger, Acquisition and Related Transactions
On November 25, 1996, the Company and Washington National Corporation
("Washington National") entered into a merger agreement. Under the agreement,
Washington National will merge with PennCorp and each holder of Washington
National common stock will receive common stock of PennCorp, subject to the
right to elect to receive a portion of the merger consideration in cash. The
merger agreement expires by its terms on August 30, 1997.
As of the date of this Form 10-Q, the Company has not yet received
clearance from the SEC to release the Joint Proxy Statement and Prospectus to
shareholders of PennCorp and Washington National for approval of the merger.
Accordingly, it is not possible to mail the proxy statement to the respective
shareholders, hold the required special meetings of stockholders, and complete
the merger by August 30, 1997. However, the Company and Washington National are
holding discussions concerning an extension of the August 30, 1997, expiration
date for completion of the merger.
The Company's pending acquisitions of the Controlling Interest in
Southwestern Financial Corporation and Subsidiaries and the Fickes and Stone
Knightsbridge Interests, as well as the annual stockholder's meeting, are also
being delayed pending completion of the SEC's Preliminary Joint Proxy Statement
and Prospectus review process relating to those transactions, including a
review of the Company's historical financial statements.
<PAGE> 25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number
<S> <C>
2.1 Revision Agreement, dated as of May 30, 1997, (the "Revision
Agreement") by and among United Companies Financial
Corporation, PennCorp Financial Group, Inc., Pacific Life
and Accident Insurance Company and each additional party set
forth on the signature pages thereto.
10.1 Amendment to Surplus Debenture in the original principal
amount of $73,000,000 issued by Pioneer Security Life
Insurance Company to American-Amicable Holdings Corporation,
dated May 17, 1996.
10.2 Second Amendment to Surplus Debenture in the original principal
amount of $73,000,000 issued by Pioneer Security Life
Insurance Company to American-Amicable Holdings Corporation,
effective January 1, 1997.
10.3 Third Amendment to Surplus Debenture in the original principal
amount of $73,000,000 issued by Pioneer Security Life
Insurance Company to American-Amicable Holdings Corporation,
effective May 14, 1997.
10.4 Amendment to Surplus Debenture Number Four in the original
principal amount of $162,539,890, issued by Pacific Life and
Accident Insurance Company to PennCorp Financial Group, Inc.,
effective January 1, 1997.
10.5 Second Amendment to Surplus Debenture Number Four in the
original principal amount of $162,539,890, issued by Pacific
Life and Accident Insurance Company to PennCorp Financial
Group, Inc., effective May 14, 1997.
10.6 Amendment to Surplus Debenture Number Five in the original
principal amount of $17,606,203, issued by Pacific Life and
Accident Insurance Company to PennCorp Financial Group, Inc.,
effective January 1, 1997.
10.7 Second Amendment to Surplus Debenture Number Five in the
original principal amount of $17,606,203, issued by Pacific
Life and Accident Insurance Company to PennCorp Financial
Group, Inc., effective May 14, 1997.
10.8 Amendment to Surplus Debenture Number Six in the original
principal amount of $55,000,000, issued by Pacific Life and
Accident Insurance Company to PennCorp Financial Group, Inc.,
effective January 1, 1997.
10.9 Second Amendment to Surplus Debenture Number Six in the original
principal amount of $55,000,000, issued by Pacific Life and
Accident Insurance Company to PennCorp Financial Group, Inc.,
effective May 14, 1997.
11.1 Computations of earnings per share
15.1 Independent Auditors' Review Report*
27 Financial Data Schedule
</TABLE>
- --------------
* Such exhibit is incorporated by reference to page 12 of this Form 10-Q.
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the quarter ended June 30, 1997.
<PAGE> 26
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PennCorp Financial Group, Inc.
---------------------------------------
(The Registrant)
Date: August 19, 1997 By:/s/Steven W. Fickes
------------------------------------
Steven W. Fickes
President and Chief Financial Officer
(Authorized officer and principal
accounting and financial officer of
the Registrant)
<PAGE> 27
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
2.1 Revision Agreement, dated as of May 30, 1997, (the "Revision
Agreement") by and among United Companies Financial Corporation,
PennCorp Financial Group, Inc., Pacific Life and Accident Insurance
Company and each additional party set forth on the signature pages
thereto.
10.1 Amendment to Surplus Debenture in the original principal amount of
$73,000,000 issued by Pioneer Security Life Insurance Company to
American-Amicable Holdings Corporation, dated May 17, 1996.
10.2 Second Amendment to Surplus Debenture in the original
principal amount of $73,000,000 issued by Pioneer Security Life
Insurance Company to American-Amicable Holdings Corporation,
effective January 1, 1997.
10.3 Third Amendment to Surplus Debenture in the original
principal amount of $73,000,000 issued by Pioneer Security Life
Insurance Company to American-Amicable Holdings Corporation,
effective May 14, 1997.
10.4 Amendment to Surplus Debenture Number Four in the original
principal amount of $162,539,890, issued by Pacific Life and
Accident Insurance Company to PennCorp Financial Group, Inc.,
effective January 1, 1997.
10.5 Second Amendment to Surplus Debenture Number Four in the
original principal amount of $162,539,890, issued by Pacific Life
and Accident Insurance Company to PennCorp Financial Group, Inc.,
effective May 14, 1997.
10.6 Amendment to Surplus Debenture Number Five in the original
principal amount of $17,606,203, issued by Pacific Life and Accident
Insurance Company to PennCorp Financial Group, Inc., effective
January 1, 1997.
10.7 Second Amendment to Surplus Debenture Number Five in the
original principal amount of $17,606,203, issued by Pacific Life and
Accident Insurance Company to PennCorp Financial Group, Inc.,
effective May 14, 1997.
10.8 Amendment to Surplus Debenture Number Six in the original
principal amount of $55,000,000, issued by Pacific Life and Accident
Insurance Company to PennCorp Financial Group, Inc., effective
January 1, 1997.
10.9 Second Amendment to Surplus Debenture Number Six in the
original principal amount of $55,000,000, issued by Pacific Life and
Accident Insurance Company to PennCorp Financial Group, Inc.,
effective May 14, 1997.
11.1 Computations of earnings per share
15.1 Independent Auditors' Review Report*
27 Financial Data Schedule
</TABLE>
- --------------
* Such exhibit is incorporated by reference to page 12 of this Form 10-Q.
<PAGE> 1
EXHIBIT 2.1
REVISION AGREEMENT
This Revision Agreement, dated as of May 30, 1997, (the "Revision
Agreement") is entered into by and among UNITED COMPANIES FINANCIAL
CORPORATION, a Louisiana corporation (the "Seller" or "UCFC"), PENNCORP
FINANCIAL GROUP, INC., a Delaware Corporation ("PennCorp"), PACIFIC LIFE AND
ACCIDENT INSURANCE COMPANY, a Texas-domiciled insurance company (the
"Purchaser") and each of the additional parties set forth on the signature page
hereto.
PRELIMINARY STATEMENT
WHEREAS, the Seller and the Purchaser entered into and executed an Amended
and Restated Stock Purchase Agreement dated as of July 24, 1996 (the "Stock
Purchase Agreement"); and
WHEREAS, pursuant to the terms of the Stock Purchase Agreement, the Seller
sold all of the issued and outstanding shares of common stock, $2.00 pare value
per share (the "Shares"), of its wholly-owned subsidiary, United Companies Life
Insurance Company, a Louisiana stock life insurance company (the "Company" or
"UCLIC"), to the Purchaser and the Purchaser purchased the Shares from the
Seller; and
WHEREAS, subsequent to the sale of the Shares, the Seller and the
Purchaser agreed to revise, in the manner set forth herein, the Stock Purchase
Agreement and certain related agreements, as indicated below, that were entered
into by Purchaser, PennCorp, Seller or certain of their affiliates.
Capitalized terms used herein and not otherwise defined shall have the meanings
ascribed to them in each of the respective agreements.
NOW, THEREFORE, in consideration of the covenants and agreements set forth
herein, the parties hereto agree as follows:
Section A. Stock Purchase Agreement
(1) UCFC and Purchaser agree that pursuant to Section 2.06 of the Stock
Purchase Agreement no Corrected Amount is owing from the Seller to the
Purchaser or from the Purchaser to the Seller.
(2) Section 5.07(a) (Use of Names and Intellectual Property) of the Stock
Purchase Agreement is hereby amended by deleting such Section in its entirety
and replacing such Section with the following:
(a) The Seller covenants and agrees that following the Closing, the
Purchaser shall have the exclusive (as provided in subclause (D) below
and to the
<PAGE> 2
extent Seller can so grant), and royalty-free right to use the
name "United" or "The United" and "Life and Annuity Insurance Company"
(the Name") in connection with the Business; provided, however, that (A)
(i) the Purchaser shall not use the words "Companies" or "Title"
immediately after the word "United" and (ii) the Purchaser will not be
permitted any use of the logo of the Seller which was used by the Company
or the Subsidiary prior to the Closing and which is attached hereto as
Exhibit 5.07 (except as provided in subclause (B) below); (B) the
Purchaser may continue to utilize the Company's existing name or the
logo, including but not limited to, on stationery, invoices, purchase
orders or other clerical or similar supplies until March 31, 1997 or such
later date as the Seller may agree; (C) any such use of the Name or logo
shall not be reasonably likely to cause confusion, mistake or deception
as to the affiliation, connection or association between Seller, on the
one hand, and Purchaser or its Affiliates (including, without limitation,
the Company and the Subsidiary after the acquisition thereof pursuant to
this Agreement), on the other hand, or as to the origin, sponsorship
or approval of the Purchaser's or its Affiliates' (including, without
limitation, the Company and the Subsidiary after the acquisition thereof
pursuant to this Agreement) goods or services and (D) Purchaser's
exclusive rights described in this Section 5.07(a) shall not limit the
right of the Seller and its Affiliates to use the Name in connection with
its business as conducted following the Closing. Notwithstanding the
foregoing, the Purchaser covenants and agrees that following the
execution of this Revision Agreement it shall, as promptly as
practicable, take all actions necessary to change the name of the Company
to United Life & Annuity Company.
(3) Section 5.20 (Location) of the Stock Purchase Agreement is hereby
amended by adding the following after the last sentence thereof:
Notwithstanding the foregoing, if the Purchaser, after the date
of this Revision Agreement, desires to reduce or remove the
Company's presence in Baton Rouge at any time, the Seller shall
cooperate with the Purchaser with respect to such reduction or
removal to minimize personal dislocation and community or
regulatory reaction. Seller shall have no obligation to offer
employment to any employee of the Company.
SECTION B. CONVERSION, STANDSTILL AND REGISTRATION RIGHTS (THE "CSR
AGREEMENT") DATED AS OF JULY 24, 1996 BY AND BETWEEN UCFC AND
PENNCORP
(1) Effective February 12, 1997, PennCorp purchased from UCFC
483,839 shares of common stock of PennCorp (the "PennCorp Shares")
subject to the CSR Agreement for the purchase price of $17,902,043 (the
"Proceeds"). At the closing of the transaction (the "Closing") which
shall occur on any business day between May 13, 1997 and June 12, 1997,
as determined by PennCorp in its sole discretion (the "Closing Date"),
provided, however, that PennCorp has provided UCFC with two business
days prior notice of the Closing Date, PennCorp shall pay to UCFC the
Proceeds plus interest at the rate
2
<PAGE> 3
of 5.134% per annum from February 12, 1997 to the Closing Date. PennCorp
shall pay the Proceeds plus interest as specified herein by wire
transfer of immediately available funds to an account designated by UCFC
at least one business day prior to the Closing Date. At the Closing on
the Closing Date, UCFC shall deliver the stock certificate previously
received by it under the CSR Agreement evidencing the PennCorp Shares to
PennCorp, duly endorsed in blank or accompanied by a duly executed stock
power, free and clear of all claims, liens and encumbrances of any kind.
Prior to the Closing Date, UCFC shall continue to maintain possession of
the PennCorp Shares as pledgee and PennCorp hereby confirms the grant of
a security interest therein in favor of UCFC to secure PennCorp's
obligation to pay to UCFC the Proceeds plus interest as specified above.
(2) PennCorp believes that it was at all times and continues to remain in
compliance in all respects with Section 8 of the CSR Agreement.
Notwithstanding the foregoing and conditioned upon PennCorp's payment of the
Proceeds plus interest as provided in Section B(1) above, UCFC releases and
discharges PennCorp of all obligations and liabilities under the CSR Agreement
with respect to or arising out of PennCorp's obligation to file with the
Securities and Exchange Commission and have declared effective a shelf
registration statement pursuant to Rule 415 of the Securities Act of 1933.
Further, and subject to such condition, UCFC hereby waives, releases and
discharges PennCorp and its predecessors, successors and assigns, and its past
and present officers, directors, employees, agents and representatives from all
actions, causes of action, suits, debts, sums of money, covenants, contracts,
agreements, promises, damages, judgments, claims and demands whatsoever, in
law, or in equity, which UCFC ever had, now has, or which UCFC or its
predecessors, successors and assigns hereafter can, shall, or may have for,
upon, or by reason of any matter, cause or thing whatsoever at any time, past
or future, relating or referring in any manner to any and all claims by UCFC or
its predecessors, successors and assigns, arising out of or with respect to
Section 8 of the CSR Agreement on or prior to the date hereof.
(3) Upon payment of the Proceeds and interest as provided in Section B(1)
above, Section 8 of the CSR Agreement shall be deleted in its entirety.
(4) Upon payment of the Proceeds and interest as provided in Section B(1)
above, Section 9 of the CSR Agreement is hereby deleted in its entirety.
PennCorp hereby waives, releases and discharges UCFC and its predecessors,
successors and assigns, and its past and present officers, directors,
employees, agents and representatives from all actions, causes of action,
suits, debts, sums of money, covenants, contracts, agreements, promises,
damages, judgments, claims and demands whatsoever, in law, or in equity, which
PennCorp ever had, now has, or which PennCorp or its predecessors, successors
and assigns hereafter can, shall, or may have for, upon, or by reason of any
matter, cause or thing whatsoever at any time, past or future, relating or
referring in any manner to any and all claims by PennCorp or its predecessors,
successors and assigns, arising out of or with respect to Section 9 of the CSR
Agreement on or prior to the date hereof.
3
<PAGE> 4
SECTION C. THREE UNITED PLAZA LEASE AGREEMENT DATED AS OF MARCH 10, 1995
(THE "LEASE"), AS AMENDED BY FIRST AMENDMENT DATED AS OF JULY
24, 1996, (THE "LEASE AGREEMENT") BY AND BETWEEN UNITED
COMPANIES REALTY & DEVELOPMENT COMPANY, INC. AND THE COMPANY
(1) Section 1 of the Lease Agreement is hereby amended by deleting such
Section in its entirety and replacing such Section with the following:
1. The Lease Term as defined in Section 1.01 of the Lease
shall terminate on January 24, 1999; provided, however, that upon
thirty days' notice from PennCorp to the Seller (the "Notice"),
the Seller shall, from and after the effective date specified in
the Notice (the "Effective Date"), sublease from the Company, and
assume all of the Company's obligations accruing from and after
the Effective Date with respect to, all or such portion(s) of the
premises currently leased by the Company as designated by PennCorp
in the Notice, on the same terms and conditions as provided in the
Lease, as amended hereby; provided, however, that if less than all
of the premises are subleased, the portion(s) subject to the
sublease shall be commercially reasonable blocks of space. Seller
shall indemnify and hold harmless the Company and the Purchaser
and their affiliates from and after the Effective Date with
respect to all obligations and liabilities accruing thereafter
under the Lease, as amended hereby, with respect to the premises
so subleased, including, without limitation, any obligation for
the payment of any rent, or additional rent or any obligations
arising from any default of the terms or conditions of the Lease,
as amended, by the Seller or any subtenant of all or any portion
of the premises so subleased.
SECTION D. AMENDMENT OF MASTER LOAN SALE AGREEMENT, DATED AS OF JULY 24,
1996 (THE "MASTER LOAN SALE AGREEMENT"), BY AND AMONG UNITED
COMPANIES LIFE INSURANCE COMPANY ("UCLIC" OR THE "PURCHASER")
AND UNITED COMPANIES LENDING CORPORATION(R) ("UCLC"),
SOUTHERN MORTGAGE ACQUISITION, INC., UNICOR MORTGAGE(R),
INC., GINGER MAE(R), INC., UNITED COMPANIES LENDING GROUP,
INC. AND UNITED COMPANIES MORTGAGE OF TENNESSEE, INC.
(COLLECTIVELY, THE "SELLERS").
The parties agree that for purposes of this Section D only, "Purchaser"
as defined above, refers to UCLIC and not to Pacific Life and Accident
Insurance Company.
(1) Section 2 of the Master Loan Sale Agreement shall be amended by
deleting the definition of S&P in its entirety.
(2) Section 3(a) of the Master Loan Sale Agreement shall be amended by
deleting the references to $30,000,000, $150,000,000 and $50,000,000 and
replacing such references with $150,000,000, $75,000,000 and $25,000,000,
respectively.
4
<PAGE> 5
(3) Section 6(f) of the Master Loan Sale Agreement shall be amended by
deleting such Section in its entirety and replacing such Section with the
following:
(f) UCLC and UCLG hereby warrant, covenant and agree that
either UCLC or UCLG shall, prior to and following the date of
execution of this Revision Agreement, maintain an actual or
implied long-term senior debt rating which is at least investment
grade from Duff (such rating, the "Credit Rating").
(4) Section 7(c) of the Master Loan Sale Agreement shall be amended by
deleting the reference to $15,000,000 and replacing such reference with
$7,500,000.
(5) Section 10 of the Master Loan Sale Agreement shall be amended by
adding the following paragraph as Section 10(c) and renumber the existing
Section 10(c) as Section 10(d):
(c) Following the Servicer's foreclosure of the Mortgaged
Property securing and Defaulted Loan pursuant to Section 3(H) of
the Servicing Agreement, the Sellers shall be jointly and
severally obligated, and each hereby agrees, to promptly (but in
no event more than ten days following the date of each such
foreclosure) repurchase suck foreclosed Mortgaged Property
acquired by the Servicer on behalf of the Purchaser by paying the
Purchaser an amount equal to the Repurchase Price for the related
defaulted Loan.
SECTION E. AMENDMENT OF SERVICING AGREEMENT, DATED AS OF JULY 24, 1996
(THE "SERVICING AGREEMENT"), BY AND BETWEEN UCLIC AND UCLC,
AS SERVICER ("SERVICER").
(1) Section 3(H) of the Servicing Agreement is hereby amended by deleting
such Section in its entirety and replacing such Section with the following:
H. Upon any Note becoming a Defaulted Note, Servicer, in
accordance with the standards set forth in Sections 3(E) and 3(I)
hereof, shall foreclose on the Mortgaged Property securing such
Defaulted Note. Promptly following the foreclosure of such
Mortgaged Property, the Sellers, pursuant to Section 10(c) of the
Master Loan Sale Agreement, as amended, shall be required to
purchase such property from UCLIC at the Purchase Price.
Notwithstanding the foregoing, Servicer may, at its option, and
from time to time purchase any Defaulted Note at the Purchaser
Price for cash. Prior to the time purchase any Defaulted Note at
the Purchaser Price for cash. Prior to the time that UCLIC has
received the full Purchase Price for each Defaulted Note, Servicer
agrees and shall be obligated to promptly distribute to UCLIC all
proceeds recovered by Servicer in connection with any foreclosure,
liquidation or other legal proceeding in an amount up to the
Purchase Price for each suck Defaulted Note. Any such proceeds
received from Servicer with respect to such Defaulted Note shall
be
5
<PAGE> 6
deemed a reduction of the Purchase Price to be paid by the
Sellers or Servicer, as applicable. UCLIC agrees to execute such
documentation as Servicer may reasonably request in order to
effect any such purchase and any "out-of-pocket" expenses incurred
by UCLIC in connection therewith shall be borne by Servicer.
SECTION F. THIS REVISION AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK,
APPLICABLE TO CONTRACTS EXECUTED IN AND TO BE PERFORMED
ENTIRELY WITHIN THAT STATE.
SECTION G. AS MODIFIED HEREIN, THE STOCK PURCHASE AGREEMENT, CSR
AGREEMENT, THE LEASE AGREEMENT AND MASTER LOAN SALE AGREEMENT
AND SERVICING AGREEMENT SHALL EACH CONTINUE IN FULL FORCE AND
EFFECT IN ACCORDANCE WITH THEIR TERMS SET FORTH THEREIN
RESPECTIVELY.
6
<PAGE> 7
IN WITNESS WHEREOF, the parties hereto have caused this Revision Agreement
to be executed as of the date first written above by their respective officers
thereunto duly authorized.
UNITED COMPANIES FINANCIAL CORPORATION
By: /s/ Dale E. Redman
-------------------------------------
Name: Dale E. Redman
Title: Executive Vice President and
Chief Financial Officer
PENNCORP FINANCIAL GROUP, INC.
By: /s/ Scott D. Silverman
-------------------------------------
Name: Scott D. Silverman
Title: Senior Vice President
General Counsel and Secretary
PACIFIC LIFE AND ACCIDENT INSURANCE
COMPANY
By: /s/ Scott D. Silverman
-------------------------------------
Name: Scott D. Silverman
Title: Senior Vice President
General Counsel and Secretary
UNITED COMPANIES LIFE INSURANCE COMPANY
UNITED LIFE & ANNUITY INSURANCE COMPANY
By: /s/ Kitty S. Kennedy
-------------------------------------
Name: Kitty S. Kennedy
Title: Executive Vice President
Chief Actuary and Chief Admin.
Officer
UNITED COMPANIES LENDING
CORPORATION(R)
By: /s/ Dale E. Redman
-------------------------------------
Name: Dale E. Redman
Title: Vice Chairman
7
<PAGE> 8
SOUTHERN MORTGAGE ACQUISITION, INC.
By: /s/ Dale E. Redman
-------------------------------
Name: Dale E. Redman
Title: Vice Chairman
UNICOR MORTGAGE(R), INC.
By: /s/ Dale E. Redman
-------------------------------
Name: Dale E. Redman
Title: Vice Chairman
GINGER MAE(R), INC.
By: /s/ Dale E. Redman
-------------------------------
Name: Dale E. Redman
Title: Vice Chairman
UNITED COMPANIES LENDING GROUP, INC.
By: /s/ Dale E. Redman
-------------------------------
Name: Dale E. Redman
Title: Vice Chairman
UNITED COMPANIES MORTGAGE OF
TENNESSEE, INC.
By: /s/ Dale E. Redman
-------------------------------
Name: Dale E. Redman
Title: Vice Chairman
UNITED COMPANIES REALTY &
DEVELOPMENT COMPANY, INC.
By: /s/ Dale E. Redman
-------------------------------
Name: Dale E. Redman
Title: Vice Chairman
8
<PAGE> 1
EXHIBIT 10.1
AMENDMENT TO
PIONEER SECURITY LIFE INSURANCE COMPANY
SURPLUS DEBENTURE
1. This Amendment applies to the Pioneer Security Life Insurance Company
Debenture dated August 31, 1994 issued to and held by American-Amicable
Holdings Corporation in the original stated sum of $73,000,000 (the
"Debenture").
2. The following sentence should be added to the end of the first full
paragraph of the Debenture:
"In the event the Loan is repaid in full prior
to the full repayment of the Surplus Debenture,
the Rate shall become 10% on the first day of
the month following the date of the Loan repayment."
3. This Amendment is a revision only, and not a novation. Except as
otherwise provided, all of the terms and conditions of the Debenture shall
remain in full force and effect.
4. This Amendment is hereby executed on May 17, 1996 by the parties.
AMERICAN-AMICABLE HOLDINGS CORPORATION
By: /s/ SCOTT D. SILVERMAN
-----------------------------------
Its: Scott D. Silverman
Senior Vice President
PIONEER SECURITY LIFE INSURANCE COMPANY
By: /s/ SCOTT D. SILVERMAN
-----------------------------------
Its: Scott D. Silverman
Senior Vice President
<PAGE> 1
EXHIBIT 10.2
PIONEER SECURITY LIFE INSURANCE COMPANY
SECOND AMENDMENT TO SURPLUS DEBENTURE
This Amendment applies to the Pioneer Security Life Insurance Company, a Texas
corporation, Surplus Debenture issued and held by American-Amicable Holdings
Corporation, a Delaware corporation, dated August 31, 1994 in the original
principal amount of $73,000,000 (the "Debenture").
1. The second paragraph of the Debenture is hereby amended in its entirety
to read as follows:
"Interest on this Surplus Debenture will be payable 45 days following the
end of each calendar quarter (each, an "interest Payment Date") and
continuing until the entire principal amount of this Surplus Debenture is
paid in full. Both principal and interest on this Surplus Debenture will
be due and payable in the following manner at the offices of Holdings:"
2. Item "4" of the Debenture is hereby amended by deleting the words "The
last day of:" from the beginning of the schedule contained therein and in
its place inserting the words "Forty Five (45) days following the last day
of:"
3. This Amendment is a revision only, and not a novation. Except as
otherwise provided, all of the terms and conditions of the Debenture shall
remain in full force and effect.
4. This Amendment shall not become effective until approved by the Texas
Department of Insurance.
Effective January 1, 1997 PIONEER SECURITY LIFE INSURANCE COMPANY
By: /s/ Ross A. Marrazzo
--------------------------
Ross A. Marrazzo
Vice President-Regulatory
and Corporate Compliance
Accepted:
AMERICAN-AMICABLE HOLDINGS CORPORATION
By: /s/ Charles H. Lubochinski
-----------------------------------
Charles H. Lubochinski
Vice President
<PAGE> 1
EXHIBIT 10.3
PIONEER SECURITY LIFE INSURANCE COMPANY
THIRD AMENDMENT TO SURPLUS DEBENTURE
This Third Amendment applies to the Pioneer Security Life Insurance Company, a
Texas corporation, Surplus Debenture issued and held by American-Amicable
Holdings Corporation, a Delaware corporation, dated August 31, 1994 in the
original principal amount of $73,000,000, as amended May 17, 1996 and January
1, 1997 (the "Debenture").
1. The second paragraph of the Debenture is hereby amended in its entirety
to read as follows:
"Interest on this Surplus Debenture will be payable each quarter on the
day in which Pioneer Security's financial statements are finalized for
the prior quarter (each, an "interest Payment Date") and continuing until
the entire principal amount of this Surplus Debenture is paid in full.
Both principal and interest on this Surplus Debenture will be due and
payable in the following manner at the offices of Holdings:"
2. The schedule set forth in Item "4" of the Debenture is hereby amended in
its entirety to read as follows:
"Each quarter on the day in which Pioneer Security's financial statements
are finalized for the prior quarter:
<TABLE>
<CAPTION>
Payment Date Principal Amount Each Date
------------ --------------------------
<S> <C>
1995 $1,000,000
1996 $1,250,000
1997 $1,500,000
1998 $1,875,000
1999 $1,875,000
2000 $2,500,000
2001 $5,000,000
2002 $3,250,000
</TABLE>
3. This Amendment is a revision only, and not a novation. Except as
otherwise provided, all of the terms and conditions of the Debenture shall
remain in full force and effect.
4. This Amendment shall not become effective until approved by the
Texas Department of Insurance.
1
<PAGE> 2
Effective May 14, 1997 PIONEER SECURITY LIFE INSURANCE COMPANY
By: /s/ Ross A. Marrazzo
--------------------------
Ross A. Marrazzo
Vice President-Regulatory
and Corporate Compliance
Accepted:
AMERICAN-AMICABLE HOLDINGS CORPORATION
By: /s/ Charles H. Lubochinski
--------------------------------
Charles H. Lubochinski
Vice President
2
<PAGE> 1
EXHIBIT 10.4
PACIFIC LIFE AND ACCIDENT INSURANCE COMPANY
AMENDMENT TO SURPLUS DEBENTURE NO. 4
This Amendment applies to the Pacific Life and Accident Insurance Company, a
Texas corporation, Surplus Debenture No. 4 issued and held by PennCorp
Financial Group, Inc., a Delaware corporation, dated January 1, 1994 in the
original principal amount of $162,539,890 (the "Debenture").
1. The second paragraph of the Debenture is hereby amended in its entirety
to read as follows:
"Interest on this Surplus Debenture will be payable 45 days following the
end of each calendar quarter (each, an "interest Payment Date") and
continuing until the entire principal amount of this Surplus Debenture is
paid in full. Both principal and interest on this Surplus Debenture will
be due and payable in the following manner at the offices of PennCorp:"
2. This Amendment is a revision only, and not a novation. Except as
otherwise provided, all of the terms and conditions of the Debenture shall
remain in full force and effect.
3. This Amendment shall not become effective until approved by the Texas
Department of Insurance.
Effective January 1, 1997 PACIFIC LIFE AND ACCIDENT
--------------------- INSURANCE COMPANY
By: /s/ Ross A. Marrazzo
---------------------------
Ross A. Marrazzo
Vice President-Regulatory
and Corporate Compliance
Accepted:
PENNCORP FINANCIAL GROUP, INC.
[STAMP]
By: /s/ Charles H. Lubochinski
---------------------------
Charles H. Lubochinski
Senior Vice President
<PAGE> 1
EXHIBIT 10.5
PACIFIC LIFE AND ACCIDENT INSURANCE COMPANY
SECOND AMENDMENT TO SURPLUS DEBENTURE NO. 4
This Second Amendment applies to the Pacific Life and Accident Insurance
Company, a Texas corporation, Surplus Debenture No. 4 issued and held by
PennCorp Financial Group, Inc., a Delaware corporation, dated January 1, 1994
in the original principal amount of $162,539,890, as amended January 1, 1997
(the "Debenture").
1. The second paragraph of the Debenture is hereby amended in its entirety
to read as follows:
"Interest on this Surplus Debenture will be payable each quarter on the
day in which PLAIC's financial statements are finalized for the prior
quarter (each, an "interest Payment Date") and continuing until the
entire principal amount of this Surplus Debenture is paid in full. Both
principal and interest on this Surplus Debenture will be due and payable
in the following manner at the offices of PennCorp:"
2. This Amendment is a revision only, and not a novation. Except as
otherwise provided, all of the terms and conditions of the Debenture shall
remain in full force and effect.
3. This Amendment shall not become effective until approved by the Texas
Department of Insurance.
Effective May 14, 1997 PACIFIC LIFE AND ACCIDENT
INSURANCE COMPANY
By: /s/ Ross A. Marrazzo
---------------------------
Ross A. Marrazzo
Vice President-Regulatory
and Corporate Compliance
Accepted:
PENNCORP FINANCIAL GROUP, INC.
By: /s/ Charles H. Lubochinski
---------------------------
Charles H. Lubochinski
Senior Vice President
<PAGE> 1
EXHIBIT 10.6
PACIFIC LIFE AND ACCIDENT INSURANCE COMPANY
AMENDMENT TO SURPLUS DEBENTURE NO. 5
This Amendment applies to the Pacific Life and Accident Insurance Company, a
Texas corporation, Surplus Debenture No. 5 issued and held by PennCorp
Financial Group, Inc., a Delaware corporation, dated September 29, 1994 in the
original principal amount of $17,606,203 (the "Debenture").
1. The second paragraph of the Debenture is hereby amended in its entirety
to read as follows:
"Interest on this Surplus Debenture will be payable 45 days following the
end of each calendar quarter (each, an "interest Payment Date") and
continuing until the entire principal amount of this Surplus Debenture is
paid in full. Subject of paragraph 6 hereof, both principal and interest
on this Surplus Debenture will be due and payable in the following manner
at the offices of PennCorp:"
2. This Amendment is a revision only, and not a novation. Except as
otherwise provided, all of the terms and conditions of the Debenture shall
remain in full force and effect.
3. This Amendment shall not become effective until approved by the Texas
Department of Insurance.
Effective January 1st, 1997 PACIFIC LIFE AND ACCIDENT
INSURANCE COMPANY
By: /s/ Ross A. Marrazzo
---------------------------
Ross A. Marrazzo
Vice President-Regulatory
and Corporate Compliance
Accepted:
PENNCORP FINANCIAL GROUP, INC.
[STAMP]
By: /s/ Charles H. Lubochinski
---------------------------
Charles H. Lubochinski
Senior Vice President
<PAGE> 1
EXHIBIT 10.7
PACIFIC LIFE AND ACCIDENT INSURANCE COMPANY
SECOND AMENDMENT TO SURPLUS DEBENTURE NO. 5
This Second Amendment applies to the Pacific Life and Accident Insurance
Company, a Texas corporation, Surplus Debenture No. 5 issued and held by
PennCorp Financial Group, Inc., a Delaware corporation, dated September 29,
1994 in the original principal amount of $17,606,203, as amended January 1,
1997 (the "Debenture").
1. The second paragraph of the Debenture is hereby amended in its entirety
to read as follows:
"Interest on this Surplus Debenture will be payable each quarter on the
day in which PLAIC's financial statements are finalized for the prior
quarter (each, an "interest Payment Date") and continuing until the
entire principal amount of this Surplus Debenture is paid in full.
Subject of paragraph 6 hereof, both principal and interest on this
Surplus Debenture will be due and payable in the following manner at the
offices of PennCorp:"
2. This Amendment is a revision only, and not a novation. Except as
otherwise provided, all of the terms and conditions of the Debenture shall
remain in full force and effect.
3. This Amendment shall not become effective until approved by the Texas
Department of Insurance.
Effective May 14, 1997 PACIFIC LIFE AND ACCIDENT
INSURANCE COMPANY
By: /s/ Ross A. Marrazzo
---------------------------
Ross A. Marrazzo
Vice President-Regulatory
and Corporate Compliance
Accepted:
PENNCORP FINANCIAL GROUP, INC.
By: /s/ Charles H. Lubochinski
---------------------------
Charles H. Lubochinski
Senior Vice President
<PAGE> 1
EXHIBIT 10.8
PACIFIC LIFE AND ACCIDENT INSURANCE COMPANY
AMENDMENT TO SURPLUS DEBENTURE NO. 6
This Amendment applies to the Pacific Life and Accident Insurance Company, a
Texas corporation, Surplus Debenture No. 6 issued and held by PennCorp
Financial Group, Inc., a Delaware corporation, dated July 26 1996 in the
original principal amount of $55,000,000 (the "Debenture").
1. The second paragraph of the Debenture is hereby amended in its entirety
to read as follows:
"Interest on this Surplus Debenture will be payable 45 days following the
end of each calendar quarter (each, an "interest Payment Date") and
continuing until the entire principal amount of this Surplus Debenture is
paid in full. Both principal and interest on this Surplus Debenture will
be due and payable in the following manner at the offices of PennCorp:"
2. This Amendment is a revision only, and not a novation. Except as
otherwise provided, all of the terms and conditions of the Debenture shall
remain in full force and effect.
3. This Amendment shall not become effective until approved by the Texas
Department of Insurance.
Effective January 1, 1997 PACIFIC LIFE AND ACCIDENT
INSURANCE COMPANY
By: /s/ Ross A. Marrazzo
---------------------------
Ross A. Marrazzo
Vice President-Regulatory
and Corporate Compliance
Accepted:
PENNCORP FINANCIAL GROUP, INC.
[STAMP]
By: /s/ Charles H. Lubochinski
---------------------------
Charles H. Lubochinski
Senior Vice President
<PAGE> 1
EXHIBIT 10.9
PACIFIC LIFE AND ACCIDENT INSURANCE COMPANY
SECOND AMENDMENT TO SURPLUS DEBENTURE NO. 6
This Second Amendment applies to the Pacific Life and Accident Insurance
Company, a Texas corporation, Surplus Debenture No. 6 issued and held by
PennCorp Financial Group, Inc., a Delaware corporation, dated July 26 1996 in
the original principal amount of $55,000,000, as amended January 1, 1997 (the
"Debenture").
1. The second paragraph of the Debenture is hereby amended in its entirety
to read as follows:
"Interest on this Surplus Debenture will be payable each quarter on the
day in which PLAIC's financial statements are finalized for the prior
quarter (each, an "interest Payment Date") and continuing until the
entire principal amount of this Surplus Debenture is paid in full. Both
principal and interest on this Surplus Debenture will be due and payable
in the following manner at the offices of PennCorp:"
2. This Amendment is a revision only, and not a novation. Except as
otherwise provided, all of the terms and conditions of the Debenture shall
remain in full force and effect.
3. This Amendment shall not become effective until approved by the Texas
Department of Insurance.
Effective May 14, 1997 PACIFIC LIFE AND ACCIDENT
INSURANCE COMPANY
By: /s/ Ross A. Marrazzo
---------------------------
Ross A. Marrazzo
Vice President-Regulatory
and Corporate Compliance
Accepted:
PENNCORP FINANCIAL GROUP, INC.
By: /s/ Charles H. Lubochinski
---------------------------
Charles H. Lubochinski
Senior Vice President
<PAGE> 1
EXHIBIT 11.1
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
-------------------------- -----------------------
THREE MONTH PERIODS ENDED SIX MONTH PERIODS ENDED
JUNE 30, JUNE 30,
-------------------------- -----------------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Primary net income applicable to common stock:
Net income applicable to common stock $13,711 $23,208 $22,671 $39,855
Extraordinary charge - - - 816
------- ------- ------- -------
$13,711 $23,208 $22,671 $40,671
======= ======= ======= =======
Fully diluted net income applicable to common stock:
Net income applicable to common stock $13,711 $23,208 $22,671 $39,855
Extraordinary charge - - - 816
Common stock equivalents:
Convertible preferred stock dividend requirements - 1,941 - 3,882
------- ------- ------- -------
$13,711 $25,149 $22,671 $44,553
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
-------------------------- -----------------------
THREE MONTH PERIODS ENDED SIX MONTH PERIODS ENDED
JUNE 30, JUNE 30,
-------------------------- -----------------------
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Primary:
Shares outstanding beginning of period 28,648 22,880 28,648 22,880
Issuance of 5,131 shares on March 5, 1996 -- 5,131 -- 3,299
Incremental shares applicable to Stock Warrants/Stock Options 975 1,318 987 1,312
Treasury shares (763) (190) (644) (190)
------ ------ ------ ------
28,860 29,139 28,991 27,301
====== ====== ====== ======
Fully diluted:
Shares outstanding beginning of period 28,648 22,880 28,648 22,880
Issuance of 5,131 shares on March 5, 1996 -- 5,131 -- 3,299
Incremental shares applicable to Stock Warrants/Stock Options 975 1,347 987 1,342
Treasury shares (763) (190) (644) (190)
Conversion of 2,300 shares of $3.375 Convertible Preferred
Stock at a rate of 2.2123 common shares to 1 preferred share -- 5,088 -- 5,088
Conversion of 2,875 shares of $3.50 Series II Convertible Preferred
Stock at a rate of 1.4327 common shares to 1 preferred share -- -- -- --
------ ------ ------ ------
28,860 34,256 28,991 32,419
====== ====== ====== ======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<DEBT-HELD-FOR-SALE> 3,065,548
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 13,398
<MORTGAGE> 258,344
<REAL-ESTATE> 19,820
<TOTAL-INVEST> 3,611,291
<CASH> 4,172
<RECOVER-REINSURE> 79,265
<DEFERRED-ACQUISITION> 305,359
<TOTAL-ASSETS> 4,824,656
<POLICY-LOSSES> 3,340,515
<UNEARNED-PREMIUMS> 13,830
<POLICY-OTHER> 42,704
<POLICY-HOLDER-FUNDS> 66,448
<NOTES-PAYABLE> 270,046
<COMMON> 288
19,002
249,670
<OTHER-SE> 592,899
<TOTAL-LIABILITY-AND-EQUITY> 4,824,656
174,996
<INVESTMENT-INCOME> 137,112
<INVESTMENT-GAINS> 8,533
<OTHER-INCOME> 11,431
<BENEFITS> 95,210
<UNDERWRITING-AMORTIZATION> 44,100
<UNDERWRITING-OTHER> 89,757
<INCOME-PRETAX> 49,397
<INCOME-TAX> 19,485
<INCOME-CONTINUING> 29,912
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,671
<EPS-PRIMARY> 0.78
<EPS-DILUTED> 0.78
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
